Business Investment and Labor Force Stability Driving Productivity Gains, Opening Door for Stronger Growth

Productivity growth has picked up recently due to more business investment and a more stable labor force, allowing for stronger economic growth without triggering high inflation.

There are signs that business investment and capital spending are increasing, which should boost productivity further. This includes rising durable goods orders, increasing capital goods imports, and rising stock prices.

As the labor market stabilizes post-pandemic, workers are gaining more experience in their roles over time, which should translate to productivity gains. New business formation is also accelerating.

If the productivity boom materializes, growth estimates will likely continue to be revised upward. Past periods of rising productivity have seen consistent underestimation of growth.

While AI may drive a productivity boom in the future, the current rebound is more rooted in increased business investment and stabilization after pandemic disruptions. But “normal” business productivity growth of 1.5-2% still provides room for stronger economic growth.