November 22, 2017
At first blush, the Bureau of Labor Statistics’ quarterly productivity report may sound inconsequential. But it can be an indication of long-term portfolio performance.
Eric Freedman, Chief Investment Officer of U.S. Bank Wealth Management, explains that the report quantifies the output achieved by U.S. businesses over the past quarter. For those in public policy — and professional and institutional investors — productivity is of enormous consequence.
“Productivity measures how many goods or services a person or a machine can produce in a set period of time,” he explains. High productivity rates help the economy grow, which can lead to higher profits and wages, fuel value for equity holders and create longer, stronger business cycles without driving up inflation.
Thanks to productivity gains over the past 50 years, the world economy has expanded sixfold and average per capita income has almost tripled, according to a report from the research firm McKinsey Global Institute.
However, productivity gains have stalled. According to Cap Trust Advisors, productivity increased almost every year from immediately after World War II until 1974, and it has been positive every year since 1982. However, over these 70 years the increase in productivity has steadily declined. Analysts anticipate little upward movement anytime soon.
The rest of the world is facing similarly sluggish rates of long-term productivity growth, according to the Bureau of Labor Statistics’ “G7 Annual Change in Productivity” chart (which accompanies this article). That should be a concern for investors, Freedman says: “Because productivity is down and likely to remain subdued for some time, it will affect capital market returns.”