The Power of Productivity

The U.S. labor market may be kicking the economic expansion into another gear.

Consistent productivity growth has been largely absent from the expansion, even as payrolls and wages have grown at a healthy clip. However, strong labor market trends and last year’s pickup in capital expenditures growth could be sparking a resurgence in productivity, which we think could be key to future economic growth.

As shown in the LPL Chart of the Day, productivity in the first quarter rose at the fastest year-over-year pace since 2010.

The Power of Productivity

Increased business spending is the primary catalyst for higher productivity, as better equipment and training boosts output per worker, although a tightening labor market has also helped. Labor shortages and accelerating wage growth normally incentivize companies to invest in boosting output with current labor. In turn, workers may get paid more as output increases, which could flow through to higher consumer spending.

Growing productivity also helps offset rising labor expenses, as companies get more output per dollar spent, which can help mitigate inflationary pressures and support healthy profit margins for U.S. companies. First quarter unit labor costs rose only 0.1% year over year, the slowest pace of growth since the fourth quarter of 2013.

“Labor market strength has been a pillar of the expansion,” said LPL Research Chief Investment Strategist John Lynch. “Job creation and wage growth remain healthy, and increased productivity points to stronger output without significantly higher costs.”

The April jobs report, released May 3, showed U.S. hiring hasn’t wavered amid global uncertainty and trade tensions. Nonfarm payrolls rose 263K, higher than estimates for a 190K gain. Average hourly earnings grew 3.2% year over year, around the fastest pace of the cycle, and at a level that should continue to bolster consumer confidence and support consumer spending. The unemployment rate fell to 3.6%, a cycle low.


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