Now You See It, Now You Don’t

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Productivity is doing more with less. It is generally gauged by measuring output, but wages also factor into the equation. If wages spike while output remains constant, productivity would decline and vice versa. Productivity grew by 3.2% from World War II until 2000 – coincidently when the number of women entering the workforce peaked. Then, despite the internet, productivity from 2000 – 2007 trended lower, around 2.6%. And since 2007 productivity has been a meager 1.2%. Productivity is needed for economic growth, thus the low GDP readings over the last 10 years should not be surprising. One of the reasons for low productivity has been lack of capital investment by businesses. When companies invest more in long-term equipment, structures, and intellectual property it makes their workers more efficient and increases output per worker hour. With the advent of easy Fed money, companies could be lazy, skip the investment and still boost share prices with dividends and share buybacks. The last three quarters of GDP have exhibited the nascent reawakening of business investment, but today’s 4th quarter productivity reading was an unexpected loser at -.10%. Yes, the quarter over quarter numbers are volatile. Maybe it’s the shortage of skilled workers; maybe it’s capital spending that is still too low; maybe it was skewed by a year-end spike in wages (the EIC employment cost index just reached a 7.5 year post crisis high); maybe it’s a calculation issue since our service driven economy is more difficult to measure than manufacturing. But after an encouraging 2.7% in the third quarter, a productivity drop of -.10% was a stark reversal. I expect somewhat of a revision and higher growth going forward as tax and regulation cuts spur businesses to make the needed investments to compete long-term. Meanwhile, the ISM manufacturing index remains robust at 59.1%, initial jobless claims dropped last week, consumer confidence remains near a 17-year high and the ADP private payroll report was a significant positive surprise, showing an additional 234k new jobs added to the economy in January.

Please view productivity and the employment cost index on page 65 of the Global Perspectives™ Book.

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