On the Mind of Investors

What is driving recent productivity growth, and can it last?

Stephanie Aliaga

Global Market Strategist

Published: 12/13/2024
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Hi, my name is Stephanie Aliaga, Global Market Strategist at J.P. Morgan Asset Management and welcome to On the Minds of investors. Today's blog answers the question, "What is driving recent productivity growth, and can it last?" As Paul Krugman famously stated in 1990, “Productivity isn’t everything, but in the long run it is almost everything.” By boosting productivity, an economy can enhance its standard of living by producing more with the same or fewer resources. In essence, productivity is a key driver of economic prosperity.

Before the pandemic, U.S. productivity growth had been declining since the mid-2000s. However, since late 2022, productivity has been growing at an encouraging rate.  The Fed is also taking notice, revising its potential GDP growth assessment upward due to these gains and exploring the factors behind this growth1.

The key question remains: is recent growth sustainable?

Productivity is notoriously difficult to explain and measure, and its drivers can take time to become evident. However, we can consider a few theories:

  1. The pandemic caused “creative destruction.”
    More than 320,000 U.S. businesses permanently shut down in the second quarter of 2020. While these businesses were not necessarily unproductive – just ill-positioned for a pandemic – the ones that came roaring back were likely the strongest of the pack. Per Joseph Schumpeter’s theory of creative destruction, the pandemic may have shifted the economy towards more productive businesses, paving the way for newer, innovative ventures. New business formation surged post-pandemic and remains historically elevated.
  2. The fruits of technological investment—the traditional kind.
    The U.S. is undoubtedly the tech hub of the world, and while generative AI has captured excitement, it’s unlikely driving productivity gains just yet. Instead, more traditional investments in automation seem responsible. Since 2012, business investment in intellectual property and R&D has steadily increased2, and a modernized capital stock can lead to all sorts of new business applications that enhance efficiency over time. Indeed, Dao and Platzer (2024) found that recent productivity gains have been concentrated in high-skill and IT-intensive sectors that saw a surge in digital investment pre-pandemic, further accelerated with the shift to telework3.
    The AI capex boom suggests further potential. The “Mag 7” tech companies are expected to spend more than $500 billion in capex and R&D next year, before considering adjacent spending on semiconductor designer & manufacturers, data centers, cooling technologies, and energy and utilities. Investments in full AI value chain could reach over $1 trillion by 20304, surpassing the entire U.S. defense budget.
  3. Work-from-home and the Great Reallocation of workers.
    Post-pandemic job churn suggests increased labor dynamism and job matching, which has boosted output-per-worker in most impacted industries—particularly those incorporating telework5.

The true drivers of productivity growth will only become clearer with time. While it may be too soon to credit AI, the timing is fortuitous as capex and innovation underway suggest potential for further acceleration. For the Fed, debate surrounding the drivers and durability of productivity gains will continue to be important in policy deliberations. Higher potential growth would justify a shallower easing cycle, as a more prosperous economy might sustain both higher interest rates and wage growth, without sparking inflation.

 

1 In the November FOMC meeting minutes, Fed staff attributed the boost in potential GDP growth to recent productivity gains and noted that the Committee debated the durability of recent productivity gains. Some participants attributed it to more transitory factors, like one-time gains from labor shortages, while others highlighted more durable drivers, like new business formation and capital investment. Participants also noted possible implications from the expanded use of AI.  

2 The 5-year ann. growth rate of inflated-adjusted business investment in IP and R&D was 6.5% in 3Q24, more than double its rate of 3.0% in 4Q12.

3 Mai Dao and Josef Platzer, “Post-Pandemic Productivity Dynamics in the United States”, IMF Working Paper, July 2024. Key sectors seeing productivity gains include information and communication, professional services, and retail services.

4 J.P. Morgan Research, 2025 Global Equity Outlook.

5 Mai Dao and Josef Platzer (2024). 

Higher potential growth would justify a shallower easing cycle, as a more prosperous economy might sustain both higher interest rates and wage growth, without sparking inflation.

As Paul Krugman famously stated in 1990, “Productivity isn’t everything, but in the long run it is almost everything.” By boosting productivity, an economy can enhance its standard of living by producing more with the same or fewer resources. In essence, productivity is a key driver of economic prosperity.

Before the pandemic, U.S. productivity growth had been declining since the mid-2000s. However, since late 2022, productivity has been growing at an encouraging rate. The Fed is also taking notice, revising its potential GDP growth assessment upward due to these gains and exploring the factors behind this growth1.

The key question remains: is recent growth sustainable?

Productivity is notoriously difficult to explain and measure, and its drivers can take time to become evident. However, we can consider a few theories:

  1. The pandemic caused “creative destruction”
    More than 320,000 U.S. businesses permanently shut down in the second quarter of 2020. While these businesses were not necessarily unproductive – just ill-positioned for a pandemic – the ones that came roaring back were likely the strongest of the pack. Per Joseph Schumpeter’s theory of creative destruction, the pandemic may have shifted the economy towards more productive businesses, paving the way for newer, innovative ventures. New business formation surged post-pandemic and remains historically elevated.
  2. The fruits of technological investment—the traditional kind
    The U.S. is undoubtedly the tech hub of the world, and while generative AI has captured excitement, it’s unlikely driving productivity gains just yet. Instead, more traditional investments in automation seem responsible. Since 2012, business investment in intellectual property and R&D has steadily increased2, and a modernized capital stock can lead to all sorts of new business applications that enhance efficiency over time. Indeed, Dao and Platzer (2024) found that recent productivity gains have been concentrated in high-skill and IT-intensive sectors that saw a surge in digital investment pre-pandemic, further accelerated with the shift to telework3.

    The AI capex boom suggests further potential. The “Mag 7” tech companies are expected to spend more than $500 billion in capex and R&D next year, before considering adjacent spending on semiconductor designer & manufacturers, data centers, cooling technologies, and energy and utilities. Investments in full AI value chain could reach over $1 trillion by 20304, surpassing the entire U.S. defense budget.
  3. Work-from-home and the Great Reallocation of workers
    Post-pandemic job churn suggests increased labor dynamism and job matching, which has boosted output-per-worker in most impacted industries—particularly those incorporating telework5.

The true drivers of productivity growth will only become clearer with time. While it may be too soon to credit AI, the timing is fortuitous as capex and innovation underway suggest potential for further acceleration. For the Fed, debate surrounding the drivers and durability of productivity gains will continue to be important in policy deliberations. Higher potential growth would justify a shallower easing cycle, as a more prosperous economy might sustain both higher interest rates and wage growth, without sparking inflation.

Ahead of a potential AI boost, labor productivity growth has been on an encouraging path

U.S. nonfarm labor productivity growth

5yr annualized rate, quarterly, seasonally adjusted

5yr annualized rate, quarterly, seasonally adjusted

Source: BLS, J.P. Morgan Asset Management. Data are as of December 13, 2024. 

1 In the November FOMC meeting minutes, Fed staff attributed the boost in potential GDP growth to recent productivity gains and noted that the Committee debated the durability of recent productivity gains. Some participants attributed it to more transitory factors, like one-time gains from labor shortages, while others highlighted more durable drivers, like new business formation and capital investment. Participants also noted possible implications from the expanded use of AI.  
2 The 5-year ann. growth rate of inflated-adjusted business investment in IP and R&D was 6.5% in 3Q24, more than double its rate of 3.0% in 4Q12. 
3 Mai Dao and Josef Platzer, “Post-Pandemic Productivity Dynamics in the United States”, IMF Working Paper, July 2024. Key sectors seeing productivity gains include information and communication, professional services, and retail services.
4 J.P. Morgan Research, 2025 Global Equity Outlook.
5 Mai Dao and Josef Platzer (2024). 
09ac241312175337
Stephanie Aliaga

Global Market Strategist

Published: 12/13/2024
Listen now
00:00

Hi, my name is Stephanie Aliaga, Global Market Strategist at J.P. Morgan Asset Management and welcome to On the Minds of investors. Today's blog answers the question, "What is driving recent productivity growth, and can it last?" As Paul Krugman famously stated in 1990, “Productivity isn’t everything, but in the long run it is almost everything.” By boosting productivity, an economy can enhance its standard of living by producing more with the same or fewer resources. In essence, productivity is a key driver of economic prosperity.

Before the pandemic, U.S. productivity growth had been declining since the mid-2000s. However, since late 2022, productivity has been growing at an encouraging rate.  The Fed is also taking notice, revising its potential GDP growth assessment upward due to these gains and exploring the factors behind this growth1.

The key question remains: is recent growth sustainable?

Productivity is notoriously difficult to explain and measure, and its drivers can take time to become evident. However, we can consider a few theories:

  1. The pandemic caused “creative destruction.”
    More than 320,000 U.S. businesses permanently shut down in the second quarter of 2020. While these businesses were not necessarily unproductive – just ill-positioned for a pandemic – the ones that came roaring back were likely the strongest of the pack. Per Joseph Schumpeter’s theory of creative destruction, the pandemic may have shifted the economy towards more productive businesses, paving the way for newer, innovative ventures. New business formation surged post-pandemic and remains historically elevated.
  2. The fruits of technological investment—the traditional kind.
    The U.S. is undoubtedly the tech hub of the world, and while generative AI has captured excitement, it’s unlikely driving productivity gains just yet. Instead, more traditional investments in automation seem responsible. Since 2012, business investment in intellectual property and R&D has steadily increased2, and a modernized capital stock can lead to all sorts of new business applications that enhance efficiency over time. Indeed, Dao and Platzer (2024) found that recent productivity gains have been concentrated in high-skill and IT-intensive sectors that saw a surge in digital investment pre-pandemic, further accelerated with the shift to telework3.
    The AI capex boom suggests further potential. The “Mag 7” tech companies are expected to spend more than $500 billion in capex and R&D next year, before considering adjacent spending on semiconductor designer & manufacturers, data centers, cooling technologies, and energy and utilities. Investments in full AI value chain could reach over $1 trillion by 20304, surpassing the entire U.S. defense budget.
  3. Work-from-home and the Great Reallocation of workers.
    Post-pandemic job churn suggests increased labor dynamism and job matching, which has boosted output-per-worker in most impacted industries—particularly those incorporating telework5.

The true drivers of productivity growth will only become clearer with time. While it may be too soon to credit AI, the timing is fortuitous as capex and innovation underway suggest potential for further acceleration. For the Fed, debate surrounding the drivers and durability of productivity gains will continue to be important in policy deliberations. Higher potential growth would justify a shallower easing cycle, as a more prosperous economy might sustain both higher interest rates and wage growth, without sparking inflation.

 

1 In the November FOMC meeting minutes, Fed staff attributed the boost in potential GDP growth to recent productivity gains and noted that the Committee debated the durability of recent productivity gains. Some participants attributed it to more transitory factors, like one-time gains from labor shortages, while others highlighted more durable drivers, like new business formation and capital investment. Participants also noted possible implications from the expanded use of AI.  

2 The 5-year ann. growth rate of inflated-adjusted business investment in IP and R&D was 6.5% in 3Q24, more than double its rate of 3.0% in 4Q12.

3 Mai Dao and Josef Platzer, “Post-Pandemic Productivity Dynamics in the United States”, IMF Working Paper, July 2024. Key sectors seeing productivity gains include information and communication, professional services, and retail services.

4 J.P. Morgan Research, 2025 Global Equity Outlook.

5 Mai Dao and Josef Platzer (2024). 

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