Productivity is one of the economic data points that are typically easy to comprehend, yet difficult to measure. By definition, productivity is the ratio of output to input. As humans, we often believe we have had a “productive” day when we see tangible results for our efforts. Other times, it is more a sense of just moving the ball forward. Conversely, on the days we encounter setbacks, we are quick to claim that it was an “unproductive” day. However, in economic lingo, the term “negative productivity” is probably more accurate.
The Bureau of Labor Statistics (BLS) publishes quarterly reports on productivity for the U.S. economy. Yesterday, the BLS released its preliminary second-quarter report claiming that labor productivity in the nonfarm business sector decreased at a 0.5% annual rate versus the first quarter. The output portion of the equation saw gains of 1.2%, but the number of hours worked (the input) grew at an even faster rate of 1.8%. Although productivity is not negative, the U.S. is now getting less output per unit of input.
The year-over-year calculation also resulted in a reduction, and the 0.4% drop was the first four-quarter U.S. labor productivity decline since 2013. This is cause for concern, but what has economists truly worried is that productivity improvements have been on a negative trend for more than a dozen years.
Historically, huge productivity gains follow the deployment of technological advances. Henry Ford’s factory assembly line for the Model T automobile embodied this concept more than 100 years ago. The introduction of robotics for manufacturing spurred another wave of productivity increases, and advances in information technology in the 1990s were responsible for huge productivity gains that carried over into the new millennium. Since that time, it has been all downhill.
Productivity and employment are in a continuous balancing act. Many fear that large productivity gains put people out of work, such as when robots replace people for various tasks. Often, these displacements are temporary, although the people displaced typically need to develop new skills. Automation has already made great inroads into the easy stuff: the well-defined repetitive tasks. Future advances might be more difficult.
For the past couple of decades, the largest employment gains have been in service-oriented industries: retailing, food service, health care, education, and transportation. It may prove to be more difficult to achieve output-versus-input advances in these areas, but not impossible. Henry Ford’s productivity enhancements created jobs instead of destroying them. He made vehicles more affordable, thereby increasing demand and creating new job opportunities. Today, the economy could use another Henry Ford, one to tackle productivity among the service industries.
Technology climbed to the top of the stack and knocked Real Estate down to second. This is the first time in calendar year 2016 that Technology has led the sector rankings. Real Estate and other high-yielding sectors, such as Utilities and Telecom, experienced declines in both relative and absolute strength. This group has been moving inversely to bond yields as they fight each other for attention among income investors. However, last week’s small bump in bond yields should not have been enough to garner big flows. Additionally, now is not the time to make large new bond investments, so it may be more of an investor shift from income to capital-appreciation securities. Sectors gaining relative strength this past week included the two-spot rise to third place for Materials, the three-place jump to fifth for Financials, and the climb out of the basement to ninth for Energy. Meanwhile, Health Care slipped a notch to fourth, Telecom dropped three places to seventh, and Utilities plunged from sixth to last. So far, the pullback in Utilities looks no different from all the others that were temporary and quickly overcome. However, investors should monitor the situation for further weakness.
Small-Cap Blend moved ahead of Small-Cap Growth to grab the top spot. However, all three Small-Cap categories have the same momentum score today, indicating there is really no difference between them at this point. Micro-Cap jumped from eighth to fourth, placing the four smallest-capitalization segments firmly at the top. Mid-Cap Value, Mid-Cap Blend, and Large-Cap Growth all moved lower to accommodate the rise of Micro-Cap. Mid-Cap Growth slipped two places and is currently preventing the rankings from displaying a complete inverse-capitalization alignment. However, it is part of a three-way tie with Mega-Cap and Large-Cap Growth, so the actual rank order has little implication here. Large-Cap Blend and Large-Cap Value remain on the bottom.
Latin America continued its dominance of the global rankings, and it has significantly increased its margin over second-place Emerging Markets. Pacific ex-Japan and China continue to hold down the third- and fourth-place spots respectively. The only change in the relative order of the global categories this week was the rise of Japan from seventh to first, which pushed the U.S. and World Equity each a notch lower. Japan posted a good week, and it now appears determined to surpass its April peak. This could also signal a breakout from its 15-month-old downtrend. The categories among the lower tier of the global rankings all posted momentum improvements over the past week. It made them all healthier, but it did not result in any position changes. The European continent continues to lag the rest of the world, with the Eurozone in 10th and the U.K. on the bottom.
“In the short term, it’s hard to be anything other than pessimistic, just because this [decline in productivity] has been going on for so long now.”
—Paul Ashworth, chief U.S. economist, Capital Economics
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