U.S. productivity growth slows sharply, weakens economic momentum

A softer first-quarter productivity reading has sharpened the case that the U.S. economy is losing momentum, even as businesses keep talking up artificial intelligence as a future boost to output. The Bureau of Labor Statistics said nonfarm business productivity rose at just a 0.3% annualized rate in the first quarter of 2026, down from an earlier 0.8% estimate and the weakest reading since the first quarter of 2025.

The same revision showed unit labor costs rising 1.8%, below the preliminary 2.3% figure, while hourly compensation increased 2.1% in the quarter and 3.3% from a year earlier. Those numbers matter because productivity measures how much output companies get from each hour of work, a key determinant of wage pressure, inflation and profits. When productivity slows and pay keeps climbing, businesses have less room to absorb costs without lifting prices or squeezing margins.

The revision also lined up with a broader downgrade in growth. The U.S. Commerce Department cut first-quarter gross domestic product growth to 1.6% from 2.0%, reinforcing the picture of a cooler economy at the start of the year. The BLS said unit labor costs rose just 0.5% over the last four quarters, but the first-quarter figures still suggest that the hoped-for efficiency gains have not yet shown up in the official data.

Even so, the long view is less bleak than the quarterly slump. The BLS said nonfarm business productivity has grown at a 2.1% annualized rate since the fourth quarter of 2019, through the first quarter of 2026, matching the long-term rate since the first quarter of 1947. Productivity in the fourth quarter of 2025 remained unrevised at 1.6%, another sign that the latest decline looks more like a soft patch than a structural break.

That distinction matters for the Federal Reserve and for companies planning around labor costs and pricing. The Federal Reserve Bank of Kansas City said in February that AI-related productivity gains are still concentrated in a small set of industries, not yet broad-based. The Federal Reserve Bank of Richmond has said AI is taking root but its eventual effect remains unknown, while the Federal Reserve Bank of San Francisco said in May that two major productivity measures do not yet show strong evidence of a new high-productivity era. For now, the numbers suggest that AI’s promised payoff remains more hope than hard evidence, and the economy is still waiting for output per worker to accelerate in a measurable way.