Everyone is getting less productive, and that's a big problem for the economy

• US productivity has fallen off a cliff over the past several quarters.
• While the current economy feels largely OK, such a decline has been an indicator of past recessions.

For all the talk about a recession, it sure doesn't feel like a downturn is upon us.

Bars and restaurants are packed nationwide. Airlines are gearing up for record traffic. People are forking over thousands to see Taylor Swift. Americans still seem willing to spend with reckless abandon.

Not to mention the red-hot jobs market, which keeps defying economist expectations as new positions are created and filled. So many jobs are flying around that the Bureau of Labor Statistics recently had to revise higher data for the last two months.

But make no mistake, negative forces are pulling the economy down — and one of the primary ones is difficult to feel in real time. That would be productivity, which measures the efficiency of the work done by a company and its employees by comparing output to hours worked.

As it stands now, the major disconnect is this: as companies keep hiring into a hot market, they're not getting as much out of their workers overall. And that's fueling a stealth economic slowdown.

The recent decline in productivity can be seen in the chart below. Note that the downward inflection point came at the end of 2021, after which the line declined meaningfully for the first time in more than a decade. Labor productivity has fallen for five straight quarters year-over-year, the longest such streak on record.

Productivity is important to the economy because it's the primary input for a population's standard of living. And it goes well beyond simply getting people to work harder. Increasing productivity also means using technology to improve workflows and overall efficiency as well as training existing employees to get the most out of these tools.

Why has it dropped in recent years? Experts including former Treasury Secretary Larry Summers attributed it to less inspired employees that were more likely to participate in trends like "quiet quitting" or "Bare Minimum Monday."

"There's a highly empowered workforce that was engaged in a certain amount of quiet quitting," Summers told The Washington Post in October. He said that it created a "certain amount of absenteeism on and off the job" that was probably leading to lower productivity.

Then there's remote work. While the ability to work from home often only applies to certain white-collar professionals, tech titans like Mark Zuckerberg and Marc Benioff have suggested that the rise of remote work was negatively impacting productivity.

Another culprit could be the practice of "labor hoarding," where employers once desperate for workers during the pandemic are holding onto them despite falling profits. As Insider reported in March, major retailers like Walmart, Target, and Kroger were locked in a labor-hoarding war over hourly employees that pushed pay higher. Labor hoarding was especially problematic while an economic downturn was already ongoing precisely because those conditions negatively affected productivity, BNP Paribas said in research from December.

Productivity did see a brief surge in the post-COVID period as people who were anxious to get back to work filled vacant jobs and put in the hours. But despite some hopes that the pandemic-era gains would be permanent, they proved unsustainable, leading to the situation we're in today.

Given how difficult it is to pinpoint one specific reason for the productivity slowdown, it's similarly tough to know what can turn things around. But a growing chorus of experts think they have an idea.

The impact of AI

The most obvious counterpoint to the ongoing productivity slowdown is the torrid rise of artificial-intelligence tools. Led by OpenAI's ChatGPT phenomenon, there's been a sudden surge of interest — and investment — in the space. It's kicked off a veritable arms race between the mega-cap tech elite.

A recent study from Stanford and MIT found that workers at a Fortune 500 software company who were given generative AI tools were 14% more productive. Those gains approached 30% for the least-experienced workers.

The Brookings Institute agreed, as did the legendary investor Paul Tudor Jones and the strategist Ed Yardeni, who said the proliferation of AI was ushering in a new "Roaring 20s."

Further, Goldman Sachs recently predicted that AI's positive impact on productivity could drive profit growth — and, by extension, the stock market — higher over the next 10 years. The firm even went as far as to say AI-driven productivity could help keep the S&P 500 charted on its long-term upward course.

However, this positive impact on productivity has not started showing up in the data yet. In the meantime, the decline in productivity is setting off alarm bells for the economy.