News & Insights

Advisor Voices: Productivity Soars

03 May 2019
Investment Strategist

Labor productivity growth in the first quarter of 2019 soared, growing at 3.6% from the previous quarter, the largest gain since the fall of 2014. On an annual basis, it rose 2.4%, which is the highest since the third quarter of 2010 as the country emerged from the recession. This is a meaningful increase, because productivity has been stubbornly low over the last eight years, with both quarterly and annualized growth averaging just 0.8%.

The BLS also measured unit labor costs in its May 2nd report, which decreased 0.9% from the last quarter, and increased just 0.1% over the last year, the lowest annual increase since the end of 2013. These lower costs are not due to lower wages, which have been increasing along with hours worked, but they may be due to better efficiency. With the tax cuts that were enacted, companies did invest some of their extra cash in improving their existing businesses. This could be the start of those new efficiencies contributing to productivity growth.

After eight slow years, we are not convinced that this one quarter is the start of a productivity boom, but if we have a trend of improved productivity, it could mean that the U.S. economy could continue to grow. This trend would likely lead to higher wages over the longer term as well, since employers can afford to pay efficient employees more without lowering their profits. This, in turn, would be another positive for the U.S. economy as the average consumer should have more money to spend.

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