Productivity Rises and Rises. But for How Long?

Now comes the hard part.

When it comes to productivity trends, US businesses have been on a torrid pace. Productivity increased 3.3% in the fourth quarter of 2023, well above the 2% analysts expected. For the year, it grew 2.5%—again, ahead of predictions. News headlines alternately described the growth as “strong,” “rapid,” or, yes, “blistering.”

But keeping this up is no easy task for corporate leaders. Indeed, experts caution that over the last two years, firms have pulled every available lever to increase productivity, and that continuing the current pace of growth can only come at a cost—whether in terms of economics or head count.

Although some experts attribute the leap in productivity to workers returning to the office, most of the data suggests other factors. For his part, Christian Hasenoehrl, senior client partner in Korn Ferry’s  Consumer and Industrial practices, singles out resilient consumer spending, along with both layoffs and hiring freezes dampening inflation. At the same time, he says, firms have now fully realized the gains from the pandemic backlog. They have also taken all the costs out of operations that they can. “Productivity is actually coming down, substantially,” he says.

Growth in the fourth quarter was, in fact, lower than in the prior two quarters. Indeed, fourth-quarter growth—including the all-important holiday shopping season—came in lower than the 3.6% increase in the second quarter. Hasenoehrl says overall productivity growth may have beaten estimates because firms were cautious in their guidance. He notes that many leaders are warning of “weakening demand” and an “uncertain outlook” on earnings calls.

Justin Ripley, a senior client partner in the Global Industrial practice at Korn Ferry, says investments in technology and artificial intelligence have also contributed to the growth in productivity: “A lot of money during the pandemic went into automating operations.” Growth surged, he says, because the efficiency and savings from those investments are baked into operations now. For productivity to continue at its current rate, Ripley says firms are going to have to increase both the amount and pace of investment. Early projections show worldwide corporate IT budgets growing 6.8% this year to just under $5 trillion, for instance, more than double 2023’s growth. 

The last lever that firms have pulled, of course, has been return-to-office mandates, which may now be producing diminishing returns, analysts say. Further, many employees see recent layoffs and increasing adoption of AI as threats to their job security. Ripley says that heavy-handed oversight of return-to-office or other employee-productivity measures could backfire at a critical time for companies. “Just because the pendulum has swung towards employers doesn’t mean it can’t swing back,” he says. 

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