There is a silver bullet for much of what ails the U.S. economy and stock market at the moment.
And the media generally ignore it (yes, we’re not shocked).
Persistent inflation? This silver bullet can fix that.
Rising labor costs and slowing earnings growth for companies? Yup.
Volatile markets and stagnating stock prices for investors? That too (by boosting earnings, it sends stocks higher).
Oh, and it brought us the two-day weekend and the 35-hour workweek.
So, you ask, what is this magical elixir?
Productivity is the key to rising living standards over long periods of human history.
Here’s how Bernard Baumohl puts it in The Secrets of Economic Indicators, his authoritative guide to economic data…
What single feat allows an economy to grow faster without any inflation, helps U.S. exporters win markets overseas, and enriches both households and corporations simultaneously? The answer is productivity growth.
And here’s the best news…
U.S. worker productivity grew at the fastest pace in three years in the third quarter. Hourly output per worker rose at a 4.7% annual pace in the three months ending in September, according to the Labor Department.
Economic output increased 5.9% during the quarter while hours worked increased just 1.1%. That’s the definition of productivity growth – economic output outpacing the number of hours worked.
“Productivity,” says Baumohl, “is by far the most important determinant in the long-term health and prosperity of an economy.”
Here’s a long-term gain to ponder: Due to productivity gains in agriculture, today it takes less than 2% of the U.S. population to grow all the food we consume. In the 1800s, about 90% of the population was needed to do so.
Productivity has major short-term benefits too.
Rising productivity allows companies to pay workers more while maintaining their profit margins and generate strong earnings. That reduces inflation because companies don’t have to raise prices to offset higher wages.
And as Alexander Green periodically reminds us, higher earnings always and everywhere eventually lead to higher stock prices.
So what’s driving this latest acceleration in productivity growth?
Behind the Gains
It’s always hard to pinpoint a single cause of productivity. That’s because truly innovative technologies – for example, the personal computer or the internet – take a while to permeate the economy and make workers more productive.
But economists point to a few things this time…
- During the pandemic, businesses implemented many new laborsaving technologies, from Zoom calls and conferences to new apps that let you order on your phone at restaurants. These laborsaving technologies remain in place today, despite the fact that the pandemic is over.
- Capital expenditures by businesses grew strongly in 2022 as businesses spent 21% more on equipment and facilities than they did the previous year. We may be seeing the results of that now, because as businesses invest in the tools, training and workers they need, they become more efficient – driving productivity.
- Finally, U.S. labor market policies may be part of the reason. According to a recent Treasury paper, the U.S. has seen greater post-pandemic productivity growth than Europe or Japan. That may be because when the pandemic hit here, many workers got laid off and then moved to more productive industries as the economy recovered. Many other countries tried to keep workers in the same jobs, so that productivity switch didn’t happen there.
No matter the cause, these recent productivity gains will help push inflation down, economic growth up, and earnings and stock prices higher.
The Upward Climb We All Want to See
This should give investors confidence that the economy can continue to grow and the market can resume its upward climb.
The companies likely to benefit the most from this productivity growth trend will be those that produce these laborsaving technologies, including 5G communications, artificial intelligence, cloud computing and semiconductors.
Also look for stocks of companies that are investing in these technologies and effectively implementing them to make their employees and their businesses more efficient.
Overall, stay positive about the future of the economy and the market. Major forces are at work – though often under the radar – that merit an optimistic outlook.