Market diary prepared by Ben Laidler, global market strategist at the investment and trading platform eToro. On this occasion, Laidler analyzes the increase in productivity that has occurred in the United States, which “boosts the economy and allows wages to rise without increasing inflationary pressures.” “This is also contributing to an idiosyncratic recovery in earnings, one of the two pillars of our bullish outlook along with upcoming rate cuts,” he explains.
PRODUCTIVITY:
In the US there has been a process of "impeccable disinflation", in which the economy and the labor market have remained resilient despite the fall in inflation. This has confused skeptics who expected a recession and has contributed to for the S&P 500 to re-enter a bull market.
The main ignored factor has been the recent doubling of productivity growth in the country. This is the only “free” thing in economics, since increasing hourly output (see graph) boosts the economy and allows wages to rise without increasing inflationary pressures.
This is also contributing to an idiosyncratic recovery in earnings, one of the two pillars of our bullish outlook along with upcoming rate cuts.
DATA:
Labor productivity, or output per hour, rose an annualized 3.2% in the fourth quarter of last year. This is the third quarterly increase of more than 3%, doubles the long-term average and follows the largest annual decline recorded in 2022.
There is skepticism about the duration of this rebound, as data is often revised significantly and we are still working through pandemic disruptions.
This could mark a return to the harsh trade-offs of a more typical economic cycle. If not, the prospects are for a "roaring 20s" boom following the pandemic, or the Spanish flu, as labor shortages force companies to increase their productivity, taking advantage of new tools. technologies and work from home available to them.
IMPACTS:
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 has been accompanied by a large increase in government stimulus for industrial policy on semiconductors, infrastructure and renewable energy. The hope is that this will alleviate the long-standing "productivity paradox," whereby greater adoption of technology does not translate into measured productivity growth.
This is helping to explain the S&P 500's rising profit margins, despite slowing sales growth, with labor being the biggest expense for most companies, albeit with a big difference between winners and losers.
Source: Territorioblockchain.com