Productivity Growth Moderates at the End of 2024
Nonfarm labor productivity increased at a 1.2% annualized rate in the fourth quarter. Smoothing through the quarterly noise, labor productivity rose 2.3% in 2024, an improvement from the 1.6% rise in 2023.
The more subdued reading on productivity growth in Q4 along with a pickup in compensation costs pushed up unit labor costs growth to a 3.0% annualized rate over the quarter. While this measure points to labor cost running a bit hot relative to the Fed’s 2% inflation goal, we take more signal from the medium-term trend in productivity growth and the Employment Cost Index, which makes labor costs look like less a threat to the Fed’s inflation objective.
The strong performance in 2024 has helped to lift productivity growth closer to its historical (post-WWII) average. Over the current business cycle (2019–2024), nonfarm labor productivity growth has averaged a 1.8% annual pace, a few tenths higher than the 1.5% pace averaged over the prior cycle (2007–2019) and a stone’s throw away from the economy’s long-term average of 2.1%.
The recent strength may reflect some catch up after anemic growth before the pandemic. Productivity was noticeably lackluster following the Great Recession, as the scars from the downturn depressed capital investment and weighed on the vibrancy of the labor market. The labor market’s normalization, combined with the prevalence of remote work and investment in labor-saving technologies since the pandemic, appear to have boosted the run rate of productivity growth in recent years.
The more subdued rate of productivity growth in the fourth quarter coincided with a pickup in compensation costs, which rose at a 4.2% annualized rate. As a result, growth in unit labor costs, which can be thought of as the productivity-adjusted cost of labor, strengthened to a 3.0% annualized rate over the quarter. When measured on a year-ago basis, the trend in unit labor costs has crept back up, and, having increased 2.7%, now looks a little strong relative to the Fed’s 2% target.
That said, given the short-term volatility in productivity and compensation costs from this report, we are cautious in taking much signal from the recent pickup. The steadier and more reliable Employment Cost Index continues to point to labor costs receding and, when measured against the current cycle’s trend in productivity, makes labor costs look less threatening to the Fed’s inflation goal.
AI CORNER
Tech Giants Double Down on Their Massive AI Spending
(…) Their comments in recent quarterly earnings reports showed the AI arms race is still gaining momentum despite investor anxiety over the impact of China’s DeepSeek and whether these big U.S. companies will sufficiently profit from their unprecedented spending spree.
Investors have been especially shaken that DeepSeek replicated much of the capability of leading American AI systems despite spending less money and using fewer and less-powerful chips, according to its Chinese developer. Leaders of the U.S. companies were unbowed, touting advances in their own technology and arguing that lower costs will make AI more affordable and grow the demand for their cloud computing services, which AI needs to operate.
“We think virtually every application that we know of today is going to be reinvented with AI inside of it,” Amazon Chief Executive Andy Jassy said on Thursday’s earnings call. (…)
“AI represents for sure the biggest opportunity since cloud and probably the biggest technology shift and opportunity in business since the internet,” Jassy said. (…)
“I think part of the reason we are so excited about the AI opportunity is we know we can drive extraordinary use cases because the cost of actually using it is going to keep coming down,” said CEO Sundar Pichai. (…)
“As AI becomes more efficient and accessible, we will see exponentially more demand,” Nadella said. (…)
“That’s generally an advantage that we’re now going to be able to provide a higher quality of service than others who don’t necessarily have the business model to support it on a sustainable basis,” he [Zuckerberg] said.
Nvidia CEO Jensen Huang is always steps ahead. Some of the things he said at CES 2025:
- “It started with perception AI — understanding images, words and sounds. Then generative AI — creating text, images and sound,” Huang said. Now, we’re entering the era of “physical AI, AI that can proceed, reason, plan and act.”
- In its early days, the concept of software as a product—abstract, yet highly valuable—was a revelation. Huang sees AI following a similar trajectory, only this time it is not software but “tokens”—the building blocks of AI—that are being produced.
These tokens, generated by AI, represent a new form of output. “We are producing a whole bunch of digital versions of something very valuable we call intelligence,” he explained. Tokens can be reconstituted into language, video or images. Soon, he argued the world might even see tokenized robotic articulation, where robots can be told in natural language to perform tasks and behave in specific ways. - The age of AI Agentics is here, a future driven by intelligent AI agents capable of assisting with tasks across industries. Huang called this emerging sector “a multi-trillion-dollar opportunity,” positioning Nvidia at the forefront of the movement. While generative AI excels at creativity and automation, Agentic AI functions more like a digital assistant, capable of handling workflows, problem-solving, and providing real-time support across industries, such as human resources, software engineering, and medicine.
- “AI agents are the new digital workforce,” he said, predicting that the different agents will change the way we work.
“The IT department of every company is going to be the HR department of AI agents in the future.” Nvidia will one day have 50,000 employees and over 100 million AI assistants, Huang predicted. And he said every organization will be see a similar growth in AI workers. “There’s no question about it,” he said. “Whether it happens in your generation or it happens in the next generation. It will happen.” - AI will be mainstream in every application for every industry.
- “AI learns not tools, but work,” Huang said. Unlike software tools designed for human use, AI can acquire skills, reason through complex problems and even collaborate with other AI systems to perform tasks autonomously. Historically focused on building tools—both hardware and software—the world is now seeing digital versions of intelligence.
“We have this new industry on top of us that never existed before,” he said. “This is the beginning of a new industrial revolution.” - Huang unveiled “Cosmos”, a new foundation model designed to advance physical AI, or AI that operates in the real world, such as autonomous vehicles or robotics. Cosmos generates synthetic data to train AI systems, accelerating their ability to navigate and adapt to real-world environments.
- Huang announced a partnership with Toyota to integrate Nvidia’s AI systems into the automaker’s autonomous vehicle development. “A trillion miles that are driven around the world each year, that’s all going to be either highly or fully autonomous,” Huang said. “I predict that this will likely be the first multi-trillion-dollar robotics industry.” Cosmos is part of Nvidia’s Omniverse expansion, supporting industrial applications in simulation, robotics, and autonomous systems.
- Top PC manufacturers and system builders are launching NIM-ready RTX AI PCs with GeForce RTX 50 Series GPUs. “AI PCs are coming to a home near you,” Huang said. “Every software engineer, every engineer, every creative artist — everybody who uses computers today as a tool — will need an AI supercomputer,” Huang said.
- Huang revealed that Project DIGITS, powered by the GB10 Grace Blackwell Superchip, represents NVIDIA’s smallest yet most powerful AI supercomputer. “This is NVIDIA’s latest AI supercomputer,” Huang said, showcasing the device. “It runs the entire NVIDIA AI stack — all of NVIDIA software runs on this. DGX Cloud runs on this.”
Huang’s CES 2025 keynote: https://youtu.be/k82RwXqZHY8
- Generative AI adoption outpaces prior technologies. (The Daily Shot)
Source: Gavekal Research
UAE Plans to Invest Up to €50 Billion In French Data Centers
A fund from the United Arab Emirates is planning to spend between €30 billion and €50 billion ($31.2 billion and $52 billion) on a new campus for data centers in France, according to French officials. (…)
In a joint statement on Friday, the countries said they would aim to build a facility dedicated to AI with one gigawatt of capacity. (…)
MGX, a $100 billion investment vehicle, is also involved in Project Stargate, the ambitious effort from SoftBank Group Corp. and OpenAI to spend $500 billion on data centers in the US. That initiative is aiming to construct around a dozen facilities with a gigawatt capacity each, Bloomberg News reported earlier.
Data centers and AI have been the centerpiece of the UAE’s strategy to diversify its economy and extend its political influence. In January, a Dubai billionaire pledged to spend $20 billion on data centers in the US. G42, an Abu Dhabi tech conglomerate, has announced major computing projects across the Middle East and Africa. (…)
The Drug Industry Is Having Its Own DeepSeek Moment It isn’t just artificial intelligence—Chinese biotechs are now developing drugs faster and cheaper than their U.S. counterparts
The biotech industry’s DeepSeek moment came last fall.
That is when Summit Therapeutics, backed by billionaire Bob Duggan, announced that its drug had outperformed Merck’s blockbuster therapy Keytruda in a head-to-head lung-cancer trial. Keytruda, a $30 billion-a-year immunotherapy juggernaut, is the bestselling drug in the pharma industry and has long dominated the market. So the prospect of a superior competitor was seismic. Even more remarkable: Summit had licensed the drug just two years earlier from a little known Chinese biotech called Akeso.
The news added billions of dollars to Summit’s market capitalization, catapulting it into biotech’s upper ranks despite having no approved drugs. While Summit’s drug still hasn’t received U.S. regulatory approval, the results were a watershed moment for the industry, underscoring the competitive threat emanating from China.
In 2020, less than 5% of large pharmaceutical transactions worth $50 million or more upfront involved China. By 2024, that number had surged to nearly 30%, according to DealForma. A decade from now, many drugs hitting the U.S. market will have originated in Chinese labs.
(…) just as DeepSeek built a formidable chatbot—allegedly on a lean budget with limited access to semiconductors—Chinese biotech companies are also scrappier, capitalizing on a highly skilled, lower-cost workforce that can move faster.
Additionally, companies can conduct clinical trials at a fraction of what they would cost in the U.S., while recent changes in the Chinese regulatory system have streamlined and accelerated the approval process to get a study started.
For now, much of China’s biotech innovation is incremental rather than groundbreaking. Many companies focus on improving existing drugs—tweaking the chemistry, enhancing efficacy or differentiating them in key ways.
But Chinese innovation is steadily improving and is already starting to disrupt the U.S. drug-development ecosystem.
(…) chief executives of large pharmaceutical companies are broadening their horizons. Why spend $10 billion acquiring a U.S. biotech with a mid-stage drug when a similar molecule can be licensed from China for a fraction of the price?
The red-hot obesity-drug market offers one example. (…)
Merck and AstraZeneca are two pharma companies looking for a way in, and both turned to China for earlier stage orals under development. In late 2024, after scouring the market for obesity assets—presumably eyeing U.S. companies like Viking Therapeutics, which trades at a market value of around $3.7 billion—Merck chose to license an oral GLP-1 drug from China’s Hansoh Pharma. The deal: $112 million upfront, with potential milestone payments of up to $1.9 billion. A year earlier, AstraZeneca made a similar move, paying $185 million upfront with future milestones totaling nearly $1.83 billion in a deal with China’s Eccogene. (…)
“It’s unquestionable that this has been a big negative for the U.S. biotech ecosystem,” said Tim Opler, a managing director of investment banking at Stifel. “The real question now is how to adapt. How do you maintain leadership in innovation while improving cost efficiency and speed?”
From a patient’s perspective, the growing global competition is a win. People with cancer probably don’t care which country a drug was developed in. What matters is that it works. But for policymakers focused on maintaining America’s competitive edge, China’s biotech surge is a wake-up call. The innovation race isn’t limited to AI or crypto—it extends deep into life sciences. (…)
FYI:
Data: Yahoo Finance. Chart: Axios Visuals