Productivity Growth Revised Down to 0.3% in Q1 2026 as Labor Costs Ease

Revised source data has taken most of the shine off the first quarter. Nonfarm business sector labor productivity increased 0.3 percent at an annual rate in the first quarter of 2026, a 0.5-percentage point downward revision from the previously reported increase of 0.8 percent. Unit labor costs increased 1.8 percent, rather than the 2.3 percent published in the preliminary estimate. Measured from the same quarter a year ago, nonfarm business sector labor productivity increased 2.8 percent. All quarterly percent changes in this release are seasonally adjusted annualized rates.

The Revised Headline

This is the revised estimate for the first quarter of 2026, built on more recent source data from BLS, the Bureau of Economic Analysis, and the Board of Governors of the Federal Reserve System than was available for the preliminary report. In the nonfarm business sector, the revisions ran in one direction:

• Labor productivity: 0.3 percent, revised from 0.8 percent
• Output: 1.0 percent, revised down 0.5 percentage point
• Hours worked: 0.7 percent, unchanged
• Hourly compensation: 2.1 percent, a 1.0-percentage point downward revision
• Unit labor costs: 1.8 percent, revised from 2.3 percent

Quarterly productivity growth of 0.3 percent follows an increase of 1.6 percent in the fourth quarter of 2025, so the first quarter is a deceleration in the pace of productivity growth. The four-quarter comparison is the steadier read, and it is firmer: productivity increased 2.8 percent from the same quarter a year ago. The two are different measures and should not be read interchangeably — the first is a single quarter expressed at an annual rate, the second a change across four quarters.

Costs: The Inflation Read Improved

BLS calculates unit labor costs as the ratio of hourly compensation to labor productivity. Compensation growth pushes them up; productivity growth pulls them down. In the first quarter, nonfarm business unit labor costs increased 1.8 percent, reflecting a 2.1-percent increase in hourly compensation against the 0.3-percent increase in productivity. Over the last four quarters, unit labor costs increased 0.5 percent.

The more consequential revision sits one quarter back. Fourth-quarter 2025 hourly compensation was revised down from a 6.3-percent increase to a 3.7-percent increase, and unit labor costs for that quarter accordingly increased 2.1 percent rather than 4.6 percent as previously reported. Productivity for the fourth quarter remained at 1.6 percent, with output and hours worked unrevised. The cost-push signal that the earlier vintage carried in the fourth quarter has largely been withdrawn — not because the economy changed, but because the compensation data did.

Workers did not capture the difference. Real hourly compensation, which takes into account consumer prices, decreased 1.4 percent in the first quarter of 2026, and increased 0.6 percent over the last four quarters. The labor share, the percentage of output that accrues to workers in the form of compensation, was 53.7 percent in the first quarter.

Output and Hours: Growth on Both Sides of the Ratio

Productivity is a ratio, and this quarter both of its terms increased. Nonfarm business output increased 1.0 percent while hours worked increased 0.7 percent, and productivity growth is what was left over. That is a different configuration from a quarter in which output stalls and hours fall — the arithmetic can deliver the same productivity number either way, but the economies are not alike. Across four quarters the same pattern holds with more room in it: output increased 3.2 percent against a 0.4-percent increase in hours worked.

Manufacturing ran ahead of the broader economy, and its components diverged beneath the aggregate:

• Manufacturing sector: productivity increased 3.2 percent, as output increased 3.3 percent and hours worked saw no growth
• Durable manufacturing: productivity increased 5.5 percent, reflecting a 5.8-percent increase in output and a 0.3-percent increase in hours worked
• Nondurable manufacturing: productivity increased 0.9 percent, as output increased 0.5 percent and hours worked decreased 0.4 percent

Manufacturing was revised as well — productivity down from a 3.6-percent increase to a 3.2-percent increase, with output growth remaining at 3.3 percent and hours worked revised up 0.4 percentage point. Unit labor costs in the total manufacturing sector increased 2.2 percent, reflecting a 5.5-percent increase in hourly compensation and a 3.2-percent increase in productivity. Against the same quarter a year ago, total manufacturing sector productivity increased 1.5 percent and manufacturing unit labor costs increased 3.4 percent.

Preliminary first-quarter measures were announced for the nonfinancial corporate sector, where productivity increased 0.7 percent as output increased 2.0 percent and hours worked increased 1.3 percent. Productivity there increased 3.6 percent over the last four quarters. Those figures are preliminary, and subject to the same kind of revision the nonfarm business numbers just absorbed.

Trend and Implications

One soft quarter does not settle the productivity question, and the cycle-length figures carry more of the argument. Over the current business cycle, starting in the fourth quarter of 2019, nonfarm business labor productivity has grown at an annualized rate of 2.1 percent through the first quarter of 2026, reflecting a 2.5-percent rate of growth in output and a 0.4-percent rate of growth in hours worked. The comparable figure for the previous business cycle, from the fourth quarter of 2007 through the fourth quarter of 2019, is 1.5 percent. The long-term rate since the first quarter of 1947 is 2.1 percent.

Manufacturing tells a thinner story. Productivity there has grown at an annualized rate of 0.5 percent during the current business cycle, as output has increased 0.1 percent and hours worked have declined 0.4 percent. The previous business cycle rate was 0.1 percent, against a long-term rate of 2.1 percent since the first quarter of 1987.

The practical question is whether compensation growth is running ahead of what productivity can absorb. On the single quarter — 2.1-percent hourly compensation growth against 0.3-percent productivity growth — the answer is yes, and unit labor costs increased accordingly. On four quarters, unit labor costs increased 0.5 percent, and the answer is no. The four-quarter figure is the one that has historically mattered for prices, and it is not currently carrying a cost-push signal.

The preliminary Productivity and Costs release for the second quarter of 2026 is scheduled for Thursday, August 6, 2026. The data point that will confirm or contradict this read is nonfarm business unit labor costs measured over four quarters, currently 0.5 percent. If that rate climbs toward the 2.1-percent pace of quarterly hourly compensation growth, the fourth-quarter cost spike this release just revised away will look like the leading edge of a compensation trend rather than a source-data artifact. If it holds near where it is, productivity is still absorbing what compensation is doing.