Productivity has been improving, and that’s a good thing. Not only does it mean employers are getting more output per worker, it also helps keep inflation tame. Better productivity is also good news for the stock market as it acts as a tailwind for profit margins, which is good for earnings growth and it may justify higher valuation premiums, counsels Sam Ro, editor of Tker.com.
According to BLS data released recently, labor productivity increased 3.2% in the fourth quarter of 2023, the third straight quarter of gains. During the period, output increased 3.5% while hours worked increased by just 0.3%.
There are lots of reasons to explain why productivity might be improving. Less churn in the labor market is one reason. In January, 3.39 million workers quit their jobs. This represented just 2.1% of the workforce, which is below the pre-pandemic trend.
When you’re new to a job, you’re probably spending a lot of time learning the ropes. The longer you stay in a job, the better you get at it. Naturally, employment cost growth has been cooling with the quits rates.
The boom in new business formation may be another reason why productivity is improving. According to monthly Census Bureau data, business applications and formations have been trending significantly above pre-pandemic levels.
Source: Census
Some of the world’s most successful businesses were started by entrepreneurs who cut their teeth at legacy companies, only to leave because they saw an opportunity to execute more efficiently. And poorly managed, unprofitable businesses tend to lay off workers, while better-managed, profitable ones tend to hire. There’s also the rapid uptake of Artificial Intelligence (AI) technologies.
Overall, there isn’t a single metric that does a great job of explaining the state of productivity in the economy. Part of the issue is there are so many ways to think of productivity conceptually. As such, improved productivity manifests in many forms.
One thing I’m pretty confident of is that everyone wants everything and everyone else to be more productive. Employers want their workers and equipment to be more productive so their companies can be more profitable. Workers want to be more productive, and we’d all love to get more done with less time and effort.
At home, everyone wants to be more productive in all they do — because life is short, and who’s got the time? And being productive doesn’t necessarily mean being active all the time. A great vacation or a good night’s sleep can be productive if it makes you refreshed and energized, which in turn can make you more productive in your other activities.
All of these needs and desires incentive people and businesses to come up with new ways to be productive. And all of this is bullish for economic activity, earnings growth, and stock prices in the long run.
