U.S. economic data has been sound this week, providing investors with good news amid a wave of conflicting headlines and market volatility.
Second quarter nonfarm productivity, released August 15, was an especially encouraging report. As shown in the LPL Chart of the Day, Nonfarm Productivity Picks Up, nonfarm productivity climbed 2.3% in the second quarter and 1.8% year over year.
Nonfarm productivity growth shows that U.S. companies are getting more output per employee, an important development in a late-cycle economy as productivity lifts gross domestic product (GDP) growth and keeps employer costs contained.
“Higher productivity is a powerful tool, as it boosts both consumer and corporate well-being,” said LPL Research Chief Investment Strategist John Lynch. “A resurgence in productivity could provide the U.S. economy a timely boost, especially as many investors wonder what could extend this near-record expansion.”
Productivity increases typically come as businesses invest in capital improvements and employee training, which is why growth in capital expenditures (capex) is a key part of our economic outlook. Over the last two quarters, productivity has increased at the fastest rate since 2014, showing that companies’ capex surge from early 2018 could be flowing through to economic output.
However, productivity gains could be limited going forward, and there are signs that last quarter’s rise may have been more of a function of fewer hours worked. Nonfarm hours worked declined 0.1% in the quarter, the biggest such drop since September 2009. Manufacturing hours were the main source of the decline, likely a consequence of weakening demand globally.
Ideally, we’d like to see the global environment stabilize and capex pick up again so the U.S. economy can reach its full potential. Unfortunately, that may not happen until we see U.S.-China trade resolution.
Please see the Midyear Outlook 2019: FUNDAMENTAL: How to Focus on What Really Matters in the Markets for additional description and disclosure.
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