U.S. Productivity Rises 3.6% in Q3 as Unit Labor Costs Fall 0.7%

U.S. nonfarm business labor productivity rose at a 3.6% annualized rate in the third quarter of 2026 as output expanded with almost no increase in hours worked. The Bureau of Labor Statistics reported Thursday that unit labor costs fell at a 0.7% annualized rate, reflecting a faster rise in production per hour than in hourly compensation.

The decline was in labor costs per unit of output, not workers’ pay. Hourly compensation increased 2.9% during the quarter, and inflation-adjusted hourly compensation also rose. That distinction is central to the report: businesses collectively produced more with nearly unchanged labor hours, giving them more output for each hour of work.

Productivity improved from a revised 2.1% annualized increase in the second quarter, when unit labor costs rose 1.9%. The preliminary third-quarter readings suggest that labor-related production costs eased even as the economy continued to expand. They do not establish whether that pace can be maintained or how individual businesses will respond.

Output grew with barely any increase in hours worked

Nonfarm business output increased 3.7% at an annual rate in July through September, compared with a 0.1% increase in hours worked, according to the BLS third-quarter productivity report. Productivity measures output per hour, so the gap between those two figures explains the 3.6% increase. The hours measure covers work performed by employees and other workers included in the agency’s sector estimates.

All quarter-to-quarter changes in the release are seasonally adjusted annualized rates. The 3.6% figure expresses the third quarter’s change as the rate that would result if the quarterly pace continued for a year. It is not a claim that productivity increased 3.6% within those three months, and it should not be confused with the change from a year earlier.

Compared with the third quarter of 2025, nonfarm business productivity increased 2.1%. Output was up 2.3% over that 12-month period, while hours worked rose 0.2%. The annual comparison is slower than the latest quarterly rate, illustrating why one strong three-month reading cannot by itself establish a lasting acceleration.

The longer view is more encouraging, though still subject to revisions. From the fourth quarter of 2019 through the latest quarter, nonfarm business productivity grew at a 2.2% annualized rate. BLS put the pace at 1.5% in the preceding business cycle, which ran from the fourth quarter of 2007 to the fourth quarter of 2019. The latest cycle’s rate also matches the agency’s long-run average since early 1947.

Separate economic data point to firmer overall activity. In its advance third-quarter GDP estimate, released October 29, the Bureau of Economic Analysis reported 3.4% annualized growth in inflation-adjusted gross domestic product, up from 2.2% in the second quarter. Investment, consumer spending and government spending contributed to the increase, partly offset by lower exports. Imports also rose.

GDP and nonfarm business productivity measure different things. GDP covers the economy’s total domestic production, while the productivity release focuses on the amount produced per hour in the nonfarm business sector. Their estimates cannot be substituted for each other, but both reports show stronger output growth during the summer. BEA also estimated a 4.9% increase in real final sales to private domestic purchasers, a measure of consumer spending and private fixed investment.

Higher compensation did not translate into higher unit labor costs

The 0.7% decrease in unit labor costs follows from how the measure is calculated. BLS divides hourly compensation by labor productivity. With compensation rising 2.9% and productivity growing 3.6% at annualized rates, employers’ compensation cost for each unit produced declined. The result is compatible with workers receiving more pay; it does not mean wages or the overall payroll bill fell.

For businesses, sustained gains in productivity can create room to absorb higher compensation without increasing labor costs for each unit of output. That can relieve one source of pressure on selling prices or support margins, depending on how companies respond. The BLS release does not report those pricing decisions, so the third-quarter cost decline is not direct evidence that consumer prices fell or profit margins rose.

The year-over-year figures also put the quarterly drop in perspective. Unit labor costs remained 2.4% higher than in the third quarter of 2025. Over the same period, hourly compensation increased 4.5%, while productivity rose 2.1%. The report therefore shows an improvement in the most recent quarter, not a year-long decline in compensation costs per unit.

After adjusting for changes in consumer prices, hourly compensation increased 1.1% at an annualized rate in the third quarter and 1.0% from a year earlier. Those readings distinguish the effect of inflation from the nominal compensation figures, though an economy-wide average cannot show what happened to every worker’s earnings or purchasing power.

Another measure in the release offers a different perspective on who receives the proceeds of production. The labor share, defined by BLS as the proportion of output going to workers in compensation, reached 53.0% in the third quarter. That was the lowest reading in the agency’s series, which begins in the first quarter of 1947. Stronger productivity and a rising average compensation measure can coexist with a declining labor share.

That longer-running distribution question is separate from the immediate inflation implications of unit labor costs. The productivity figures establish what happened to measured output, labor input and compensation; they do not identify a single cause for the change or show how much of the gain came from technology, investment, industry mix or other factors.

Manufacturing lagged as historical revisions changed comparisons

The broader productivity gain did not extend evenly across industries. Manufacturing productivity rose just 0.3% at an annual rate during the third quarter, with factory output up 1.3% and hours worked increasing 1.0%. Unlike the nonfarm business sector as a whole, manufacturing recorded higher unit labor costs, which increased 2.7% as hourly compensation rose 3.0%.

Within manufacturing, the differences were substantial. Durable-goods productivity grew 2.2%, supported by a 3.8% rise in output, while productivity in nondurable manufacturing fell 1.7% as output declined 1.6%. Unit labor costs in manufacturing were 4.0% above their level a year earlier. BLS cautions that the methods used to measure manufacturing output differ from those used for the broader business sectors, so their output series are not directly comparable.

Revisions also changed the baseline for judging the third-quarter results. The second-quarter nonfarm business productivity estimate was raised to 2.1% from the previously reported 1.4%, reflecting an upward revision to output with no change to the hours-worked estimate. Unit labor cost growth for that quarter was revised to 1.9% from 1.2%, as the revision to hourly compensation more than offset the productivity change.

These adjustments followed the September 30 annual update of national income and product accounts from BEA. The BLS report incorporates revised output and compensation data stretching back to 2021 for the affected business-sector series, rather than merely updating the newest quarter. Comparisons with older productivity releases may therefore use a different historical base.

More complete data will provide two opportunities to reassess the quarter. BEA is scheduled to publish its second estimate of third-quarter GDP on November 25. BLS plans to release revised third-quarter productivity and unit labor cost figures on December 8, including any changes to the preliminary 3.6% productivity gain and 0.7% decline in unit labor costs.