Productivity: A potential positive surprise for the market

by Laura Ehrenberg-Chesler on December 12, 2017

in Economic Indicators,Employment,equity market,inflation/deflation

From the “Wall Street Journal”:
“Perhaps 2018 will be the year productivity finally begins to pick up. Technologies such as speech recognition, online chatbots and machine learning are being quickly adopted, capital spending is picking up and tight labor markets give companies an incentive to find better ways of working.

“… productivity leapt 3% in the third quarter of this year, and while quarterly data are volatile, it is plausible that a productivity pickup is coming soon. It will be critical to how both the market and the Fed should react to signs of wage rises. Without productivity growth, higher wages are bad news for profits. Either companies accept lower margins, immediately bad for the stock price, or they pass on higher wage costs into prices, pushing up inflation and prompting the Fed to raise rates more quickly. With productivity improvements that nasty choice can be avoided, as the gains can be passed on to workers while maintaining margins.

“Forecasters have spent a decade unsuccessfully predicting that productivity growth is about to return, so it feels rather optimistic to predict it now. A lesson many economists take from the past 10 years is that productivity has permanently slowed. A better lesson is that it is hard to forecast, and investors need to be open-minded about what will happen.”

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