The US economy remains in a solid position, with new data released on Tuesday emphasizing that strength in the face of high interest rates.
Productivity growth in the third quarter was left unrevised at a healthy 2.2% on a sequential basis, while the year-over-year rate remained unchanged at 2.0%.
“Productivity growth, which over the last year has exceeded the average for the business cycle, may slow in response to looser labor market conditions but we expect it to continue at a solid pace,” Nancy Vanden Houten, lead US economist at Oxford Economics, wrote in reaction to the data.
The economist said productivity strength is “partly a response to the tight labor market conditions over the past few years” but that there have been structural changes as well, including “the surge in business dynamism and stronger investment in intellectual property and research and development.”
“As a result, we think trend growth in the US economy is currently above 2%,” Houten said.
Chris Rupkey, chief economist at FWDBONDS, added higher productivity trends might mean interest rates are closer to neutral than initially thought.
The data “calls into question just how restrictive the Federal Reserve’s interest policy actually is,” Rupkey said. “With productivity data like these in hand, the hawks at the Fed can argue that interest rates are closer to neutral than the committee previously believed.”
The economist said the strong trend likely won’t stop the Fed from cutting rates again next week, “but the number of rate cuts needed in 2025 remains an open question.”