Job Gains and Productivity
Last week the equity markets hit all-time highs after a positive July jobs report along with an upward revision of the June payrolls. In July, 255,000 jobs were added broadly across all sectors and industries as illustrated below and average hourly earnings increased by a solid 2.6%. This employment strength was in contrast to a disappointing GDP report just one week ago which showed the U.S. economy increasing by 1.2% versus expectations of 2.5% growth.
The labor market has added an average of 190,000 jobs a month over the last 6 months, yet the economy is still growing below trend. Part of the blame for this can be seen in the productivity numbers which were released Tuesday morning showing a decline of -0.5%. This was the third consecutive quarterly decline in productivity and the longest stretch of negative productivity since 1979. For the last five years, the productivity numbers are close to zero, which helps explain the weak GDP growth exhibited over the last few years. As shown in the second quarter GDP numbers, consumer spending is healthy, but corporations are not making capital investments. Productivity will likely remain low until there is a pick-up in capital spending.
The accommodative monetary policy the Federal Reserve has undertaken over the last seven years has failed to spur corporate spending on capital improvements. Instead, companies took advantage of the policy by refinancing their debt at lower interest rates, buying back stock, and increasing dividends. In order for businesses to open their purse strings and spend, fiscal reforms need to be enacted. Both presidential candidates are talking about tax reform and increased infrastructure spending which could lead to increased productivity. We see this as a positive for the economy as increased corporate spending will boost demand for many goods and services which could lead us out of the below-trend economic growth we have mired in for the last few years. We welcome this type of change.
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