The Productivity Boom Economists Didn’t See Coming | The American Spectator

First, economists complained about Trump’s low inflation figures, then it was the “unbelievable” growth in the economy, next it was solid wage growth and a confident consumer, suggesting the economic expansion should continue at a healthy pace in 2026. Now, it’s something else.

Productivity is surging in America, and this points to mild inflation even though wages rise and rapid economic growth continues. It’s a win-win for America, and mainstream economists don’t like it.

The U.S. Bureau of Labor Statistics reported Thursday that productivity rose at an annualized rate of 4.9 percent in Q3 of last year and 4.1 percent in Q2, consistent with earlier estimates. That makes the first two full quarters of Trump’s presidency the best two consecutive quarters since, well… the last time Trump was president.

The numbers actually understate the remarkable upward shift in productivity. During the pandemic era, productivity spiked, but only because millions were laid off. That’s more or less typical of economic downturns — the least productive workers receive “pink slips”; thus, the ratio of economic output to man-hours worked — which is how the government calculates productivity — goes up. Now, however, productivity numbers are above 4.0 percent even though unemployment remains stable — economic output continues to grow.

The really good news is that there’s reason to suspect that we may have entered a period (perhaps an era) of high productivity growth. After a few quarters of remarkably good productivity in 2023, Cleveland Federal Reserve economists ran a statistical model aimed at detecting what they term productivity “regime changes” — no, this has nothing to do with Venezuela! They calculated the probability that the U.S. economy had shifted into a high-growth phase at roughly 40 percent. (They noted that it would take a few more quarters to reach a “more unambiguous conclusion.”)

The second and third quarter numbers mentioned previously are helpful in understanding their conclusions. The figures suggest that what the Cleveland Fed economists were seeing last year — they ran their model in January 2025 — was not just a transitory spike but a sustainable rate of real growth, which economists call… productivity.

What’s Causing the Higher Productivity?

Mainstream economists are stumped about this phenomenon. Most think it is too early to be caused by the advent of artificial intelligence. The fact that manufacturing productivity and output are rising so rapidly suggests that it is probably not AI but rather something more significant: investment in innovation more broadly in the economy.

What is precipitating this is Trump’s economics. And the most likely factors are a tight labor market and the end of the offshoring policies of previous administrations. After more than a few decades of productivity suffering because businesses could rely on abundant and cheap labor at home and abroad, many have now realized that they have to switch to domestic investment to achieve growth.

Even after Trump departs the White House, it’s unlikely we’ll see the permissive immigration policies we saw under Biden and Obama (and Bush before that), and we’re not returning to the era of globalization. There has been a paradigm shift in economic policy in America.

A major reason for this shift is Trump’s new tax incentives for capital investment. Making 100 percent expensing for capital outlays permanent has likely incentivized companies to invest more heavily in the U.S. and adopt business models built around capital investment and agentic AI rather than payroll expansion. The old tax rules made capital investment costly by only allowing deductions spread over several years, while labor costs were immediately deductible. Trump’s new tax rules level the playing field.

But to be fair, it’s not all Trump policy at work here — or at least not all recent Trump policies. The improvement in productivity began back in 2023 and 2024, which is when it caught the eye of those economists at the Cleveland Fed. The most likely drivers, however, did have their origin with Trump. For one thing, Biden surprised many by leaving the tariffs from Trump’s first term in place — they realized they work. And this is important; it signaled to businesses that tariffs were not something they could just wait out. Moreover, the labor market was extraordinarily tight in those years, with job openings far exceeding the number of people seeking employment.

Trump’s immigration and tariff policies in his second term are now doubling down on these. The growth of the workforce has slowed dramatically because immigration has been curbed, as has the rising cost of imported goods. As a result, the relative benefits of investing in domestic productivity have increased dramatically.

The recent report that steel production in the United States has surpassed Japan’s steel production for the first time in 26 years is a testament to Trump’s push for domestic production.

In 2025, U.S. steel production surpassed Japan, becoming the world’s third-largest steel producer. This is the first time since 1999 that the U.S. has produced more steel than Tokyo.

“U.S. crude steel production in 2025 was up 3.1 percent to 82 million tons, the first rise in two years, according to the World Steel Association,” Nikkei Asia reports. “The growth is due in large part to the Trump administration’s tariff policies.”

Last year, Trump initially placed 25 percent tariffs on imported steel and aluminum products. Those tariff rates were later doubled to 50 percent, which has helped drastically boost steel production in the United States.

Leon Topalian, the CEO of U.S. steel producer Nucor, remarked that Trump’s tariffs were not hurting American manufacturing and, in fact, were a bright spot in the nation’s economy. “[T]he demand, the robustness that we see in this economy, again, I think 2026 is shaping up to be a very, very solid year for Nucor,” Topalian said.

So, here’s the thing: this is the exact opposite of what tariff critics predicted. They admonished that if tariffs forced the U.S. to produce more domestically, productivity would decline as workers were drawn into less efficient sectors. What they missed was that foreign intervention in the economy had so badly distorted global production that reinvigorating production would actually improve productivity, and businesses would seek to lower costs by investing in productivity-increasing technology.

They failed to consider the bigger picture of how the American economy was so negatively influenced by previous administrations’ promoting offshore policies. They had become enamored with the status quo without considering the effect of real productivity growth through domestic reinvestment — which they never believed was profitable (or even possible) before Trump.

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