Ben Laidler, a global markets strategist on the investment and trading platform eToro, analyzed the increase in productivity that occurred in the United States, which “boosted the economy and allowed wages to rise without increasing inflationary pressures.” “This also contributed to an idiosyncratic recovery in earnings, one of the two pillars of our bullish outlook, along with future rate cuts,” he explained.
In the US, there is a process of “impeccable disinflation,” where the economy and the labor market remain strong despite the drop in inflation. This confounded skeptics who expected a recession and helped push the S&P 500 back into a bull market. The main factor that has been ignored is the recent doubling of the country’s productivity growth. This is the only “free” thing in the economy, because an increase in hourly production expands the economy and allows wages to rise without increasing inflationary pressures. It also contributed to an idiosyncratic recovery in earnings, one of the two pillars of our bullish outlook, along with future rate cuts.
Labor productivity, or output per hour, rose an annualized 3.2% in the fourth quarter of last year. This is the third quarterly increase above 3%, doubling the long-term average and following the biggest annual decline on record in 2022. There is doubt about the duration of this rebound, as the data is constantly revised. significantly, and we continue to work. pandemic troubles. This could mark the return of violent trade-offs in a more typical economic cycle. Otherwise, the prospects for a “roaring 20s” development after the pandemic, or the Spanish flu, as the lack of workers forces companies to increase their productivity, taking advantage of the new tools and technologies and work from home available to them.
Wage growth has apparently driven greater investment in technology, automation, and training as companies seek to increase efficiency, and business investment has resisted even rising interest rates. This is accompanied by a large increase in government stimulus for industrial policy in semiconductors, infrastructure, and renewable energy. The hope is that this will alleviate the long-standing “productivity paradox,” where greater adoption of technology does not translate into measurable productivity growth. This helps explain the increase in profit margins in the S&P 500, despite slower sales growth, with labor being the biggest cost for most companies, although there is a wide variation between the winners. and losers.