U.S. Workers Productivity Declines in Q1 2025, Data Shows

U.S. worker productivity declined for the first time in almost three years in the first quarter of 2025, in a sign of mounting economic slow down. The Bureau of Labor Statistics published data showing that non-farm productivity, which measures output per hour worked, fell at an annualized rate of 0.8% from January to March. This decline was the first decline since the second quarter of 2022 following a growth rate of 1.7% in the previous quarter.

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Economists by Reuters had forecast a small 0.7% decrease but the decline was deeper than hoped. For example, the decline in productivity occurs in a tough economic landscape in which businesses are facing growing costs of labor and other economic pressure. The slowdown was echoed by the government in its prior release of the Gross Domestic Product (GDP) meaning that the economy had contracted at a 0.3% annualized pace which is a decline in GDP for the first time in three years.

Productivity declined at a 0.8% annualized rate in Q1, the first decline since 2022. pic.twitter.com/r3hmlhdJZe

— Steven Rattner (@SteveRattner) May 8, 2025

A major factor contributing to the decline in productivity is increased imports ahead of President Donald Trump’s tariffs that included a 145% duty on Chinese imports. Imports skyrocketed as firms hoarded goods prior to the implementation of duties, flooding the economy with imports and interrupting production cycles.

Moreover, higher labor costs are pressuring businesses. Unit labor costs which measure labor costs per unit of output rose 5.7% in the first quarter following a revised 2.0% last quarter. Hourly compensation also rose, increasing at 4.8%. This increase in costs could tighten business margins when they are already facing rising prices from tariffs.

As the Federal Reserve stated, even with those difficult headwinds they are happy to keep rates (federal funds rate) in the 4.25%-4.50% range but acknowledged that the risks of higher unemployment and inflation have grown. The labor market is showing some signs of softening and policymakers will have to grapple with more uncertainty and increased challenges to contain inflation or at least stay within their target range.

A slowdown in productivity could eventually act as a brake on business investment and economic growth which could present challenges for workers and employers as the economy is turbulent and in a state of flux.