What is total factor productivity and why has it slowed?

The short answer

Total factor productivity (TFP) is the residual in growth accounting. After you account for additional hours worked and additional capital invested, what remains is TFP — the efficiency gain that comes from better technology, better organization, or better allocation of resources. Robert Solow’s 1956 Nobel-winning work made this residual the dominant explanation of long-run growth.

The puzzle is that the residual has been shrinking. The post-WWII golden age delivered TFP gains close to 2% per year. The decades since 1973 have averaged roughly half that, with a temporary IT-driven rebound around 1995-2003 and a renewed slowdown after 2005. Robert Gordon and others argue this reflects a structural exhaustion of general-purpose innovations.

But the diagnosis is contested. Corrado, Hulten and Sichel show that intangible capital — software, R&D, brands, organizational know-how — was largely missing from official statistics, and that adding it back increases measured productivity meaningfully.

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What the data shows

Drawing on John Fernald’s series at the San Francisco Fed and BLS data, the trajectory of US TFP growth is one of the best-documented macro facts of the postwar era.

The US context (Fernald / BLS, 1948-2025):

• 1948-1973 (golden age): TFP growth averaged ~2.15% per year
• 1973-1995 (productivity puzzle): collapsed to ~0.47% per year
• 1995-2003 (IT boom): rebounded to ~1.81% per year
• 2003-2007: slowed back to ~0.71% per year
• 2005-2019 (utilization-adjusted): only ~0.14% per year
• 2024: BLS reports TFP up 1.5% in private nonfarm business; 2025: +0.8%

The exception worth noting: agricultural TFP has grown at a remarkably steady ~1.47% per year over 1948-2017 (USDA-ERS), suggesting the slowdown is concentrated in non-farm sectors, particularly services. Vollrath estimates that even the post-2005 trend lies 36% below the 1948-1972 trendline — a massive cumulative gap.

→ Dataset: US Real GDP Level Dataset

Why it happens — the macro mechanism

The TFP slowdown is the empirical anchor for several competing structural narratives.

Channel 1 — Innovation exhaustion thesis. Robert Gordon argues that the great inventions of the late 19th and early 20th centuries — electricity, the internal combustion engine, indoor plumbing, antibiotics — produced a one-time productivity windfall that has now been fully absorbed. Subsequent innovations (digital, internet) have been narrower in scope. This view is consistent with the long persistence of the slowdown across two business cycles. See our FAQ on secular decline in real rates, which links this exhaustion to falling r-star.

Channel 2 — Mismeasurement of intangibles. Corrado, Hulten and Sichel showed that as much as $800 billion of intangible investment was excluded from US GDP as of 2003. The 2022 Crouzet-Eberly-Eisfeldt-Papanikolaou paper documents that the ratio of intangible to tangible capital in the US rose from 75% in 1975 to over 100% in 2021. WIPO 2024 estimates that unmeasured intangibles would add about 0.2 percentage points to US labor productivity growth over 2010-2024. The angle that distinguishes this view: the slowdown may be partly statistical artifact, not real economic stagnation. See our FAQ on intangible capital and valuations.

A third channel runs through resource misallocation.

Channel 3 — Misallocation and rising market power. The De Loecker-Eeckhout-Unger 2020 study documents that aggregate markups rose from 21% above marginal cost in 1980 to 61% in 2016, concentrated in the top of the firm distribution. Higher markups imply more resources stuck in less-productive incumbents and less reallocation toward frontier firms — a TFP drag. See our FAQ on monopoly concentration and macro statistics.

Synthesis by regime. In the golden age 1948-1973, infrastructure build-out and the late absorption of general-purpose technologies delivered TFP growth near 2% with broad-based diffusion. From 1973 to 1995, the manufacturing share fell, services rose, and TFP growth fell to roughly a quarter of its earlier pace despite massive R&D spending. The 1995-2003 IT rebound proved temporary, and the post-2005 plateau coincides with the rise of intangible capital — suggesting the regime change is as much about what we measure as about what we produce.

The productivity slowdown did not start in 2008 — it started in 1973. What changed in 2008 was that we ran out of stories that explained it away.

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What it means for different economic actors

Long-term investors. Lower TFP growth implies lower potential GDP growth, which historically translates into lower trend earnings growth at the index level. This is one of the structural arguments behind compressed equity returns expectations relative to the post-1948 average.

Policymakers. Slow TFP growth narrows fiscal space because tax revenues track nominal GDP. It also limits how aggressively monetary policy can cut rates without overheating, since potential growth caps the non-inflationary speed limit.

Frontier firms. Even in a slow-TFP economy, individual firms can post high productivity gains. The data shows TFP gains have become more concentrated in “superstar” firms while the long tail stagnates — meaning the aggregate average masks growing dispersion.

A common error is to treat any single annual TFP number as informative about the trend. Annual TFP estimates fluctuate substantially around recessions, expansions and revisions; only multi-year averages tell the structural story.

Practical observation

Go deeper

Related questions

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Frequently asked questions

Is TFP the same as labor productivity?

No. Labor productivity measures output per hour worked and includes both TFP and capital deepening (more machinery and equipment per worker). TFP isolates the residual — the gain that cannot be attributed to adding more inputs. In the US over 1948-2013, capital deepening explained roughly half of labor productivity growth in some periods, so TFP movements alone do not capture the full productivity story.

Why might the productivity slowdown be partly mismeasurement of intangibles?

Traditional GDP accounting treats spending on R&D, software, brands and organizational know-how as expenses, not investments. Corrado-Hulten-Sichel and the Crouzet et al 2022 paper show that intangible capital now exceeds tangible capital in US public companies. WIPO 2024 estimates that incorporating these unmeasured intangibles would have added about 0.2 percentage points to measured US labor productivity growth over 2010-2024 — material, but not enough on its own to fully reverse the slowdown narrative.

Did the 2020-2024 surge in TFP reverse the slowdown?

The BLS reported TFP growth of 1.5% in 2024 and 0.8% in 2025 for the private nonfarm business sector — above the post-2005 average. But annual TFP swings are noisy, and a sustained reversal would require multiple consecutive years above 1.5%, which historically has only happened in two periods since 1973 (briefly in the late 1990s and partly in 2009-2010). The structural story is unchanged until and unless that pattern persists.

Last updated — 12 July 2026