I’ve written about this topic several times in recent years, but it’s so important that I feel the need to revisit it every now and again.
And now is a particularly good time to do so (more on that in a moment).
First, a few fundamental questions about the economy and markets:
- What raises everyone’s living standards?
- What allows workers to put in fewer hours but make more money?
- What keeps inflation low and stable?
- What makes companies more efficient and more profitable (and drives their earnings and stock prices higher)?
- What brought us the two-day weekend and, for many, the 35-hour work week?
Yes, there’s one answer to all of these: productivity.
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.
Baumohl is right on the money (as usual).
And we learned this month that productivity is soaring right now.
Productivity, defined as employee output per hour, rose at a 3.2% pace in the fourth quarter. That came after it surged 4.9% in the third quarter.
Here’s a 10-year chart of labor productivity for U.S. workers, courtesy of the Bureau of Labor Statistics and the Federal Reserve Bank of St. Louis. You can see that, after stagnating for a couple of years, it turned up at the beginning of 2023 and is headed sharply higher.
This is particularly great news for companies and their shareholders.
Remember that labor is the biggest expense for most businesses. It accounts for an average of 50% to 60% of a typical Fortune 500 company’s spending and over 70% of spending for firms in labor-intensive industries such as healthcare, education and hospitality.
That’s not just salaries and wages. It includes recruiting, management expenses, employee benefits, payroll taxes, and many other expenses that come between the top and bottom lines on a firm’s income statement.
So getting more output per hour out of each worker – by increasing their productivity with better equipment and training, for example – is massively profit-enhancing for companies.
The drivers of productivity growth are usually new technologies, though it’s not always obvious how and when they feed into greater worker efficiencies and output. For example, it took a while for the advent of the internet to show up in productivity data.
But economists speculate that the use of certain technologies that were adopted during the pandemic has something to do with the strong productivity numbers we’re seeing today.
Many companies invested in better computers and software to allow people to work together online (and prevent the dreaded virus from spreading). Today, we’re no longer so worried about COVID-19, but we’re still using those hardware and software tools.
Looking Forward
Can the surge in productivity that began about a year ago continue?
According to a recent Philadelphia Fed survey of economic forecasters, it definitely can. The consensus forecast for the next decade is that labor productivity will rise 1.5% per year. When you consider the cumulative effect over 10 years, you can expect a real increase in worker output per hour.
And what will drive this productivity boom?
Again, there’s much speculation. But the current thinking is that there’s an innovation boom emerging that could bring huge efficiencies to many industries. Artificial intelligence is just one example of it.
Chief Investment Strategist Alexander Green and I are very much on board with this idea. In fact, we’ve identified eight cutting-edge technologies, or “megatrends,” that will raise productivity in many (if not all) industries, bring enormous upside for investors who pick the companies that are putting them to the best use, and transform our world for the better.
Keep watching this space – and better, The Oxford Communiqué – as we find those companies this year.
Go here to learn how to gain access to the Communiqué today (you won’t regret it).