A 15-year problem that has plagued corporate America is finally turning around
American workers are becoming more productive.
Recent analysis from Bank of America showed the average revenue per worker for companies in the S&P 500 hit an all-time high in February after 15 years of no gains. This is one of several signs that labor productivity is rebounding after slumping during 2022.
Some on Wall Street think the developments in labor productivity could help the stock market survive stickier-than-expected inflation that has emerged as a concern in recent weeks.
“If productivity goes higher, then [companies] are able to cut costs, improve margins, things like that,” Bank of America US and Canada equity strategist Ohsung Kwon told Yahoo Finance. “That’s why companies are so focused on improving productivity. There’s a lot of macro headwinds happening. So they are trying to find ways to improve productivity and sort of offset those headwinds.”
The headwinds Kwon references include the risk the Federal Reserve holds off on cutting interest rates as inflation’s path downward continues to prove bumpier than initially hoped. Two separate reports released this week showed inflation was hotter than economists expected in February. And annual wage growth during the month was higher than what economists have said the Fed wants to see to feel confident inflation is moving down to its 2% target.
The research team at Carson Group argues an increase in productivity could offset these concerns, though.
“With productivity soaring like it is and will hopefully continue like it can, you don’t have to worry about inflation coming back, you really don’t,” Carson Group chief market strategist Ryan Detrick told Yahoo Finance.
Detrick’s colleague Sonu Varghese explained that persistent wage growth can usually cause an inflation problem if consumers have more money to spend on goods. Demand for goods would rise as workers make more money, therefore pushing prices higher. This paradigm shifts, though, if productivity picks up. In that instance, the economy could sustain higher wages because companies would also be producing more goods. If both the demand and supply of goods pick up, then prices can remain stable.
Varghese highlighted two different instances where wage growth surged. In the 1970s, wage growth picked up but productivity didn’t, leading to a decade-long battle with persistent inflation. In the 1990s, wage growth gains were met with a productivity boom and subsequently led to a prosperous stretch for both US economic growth and stock market gains.
As productivity picks up, it increases the overall trajectory of the US economic growth, Renaissance Macro head of economic research Neil Dutta told Yahoo Finance.
That’s welcome news for stocks.
Companies can choose to use their increased financial gains from productivity in a variety of ways. One would be to keep boosting wages to lure in more workers. But recent shifts in the labor market show that likely won’t be the case.
The labor market has shown some signs of softening and the large pay bumps needed to lure workers in the post-lockdown job market have eased. The quits rate, a sign of confidence among workers, hit its lowest level since August 2020 in January.
This would indicate that companies would take their additional revenues from increased productivity and use them to boost margins. Higher margins are usually a tailwind for future company earnings, which would in theory lift equities.
All of this comes without a mention of artificial intelligence, which has been lauded as a potential productivity booster.
“AI is kind of like the cherry on the top,” Kwon said. “AI obviously is going to be a huge productivity enhancer. I don’t know when that’s going to happen. But we do think that is going to happen and be a huge boost to productivity as well.”
Josh Schafer is a reporter for Yahoo Finance. Follow him on X @_joshschafer.
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