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A Structural Piece of the Economic Backdrop Remains Challenged

CAMS Weekly View from the Corner – Week ending 2/10/2023

February 13, 2023

In our previous edition we offered we would circle back on some important economic releases that came out during the entry week into February. That week offered a plethora of updated information that was mostly overwhelmed with the fact that the Federal Reserve was also meeting and releasing their updated plans on interest rates. While last week we went “high level” and examined the Fed’s jawboning tool through the lens of diminished (some would offer lost) credibility this week we will go structural through the important metric of Productivity. In the aforementioned “Fed Week” the quarterly results for U.S. Labor Productivity – All Workers was released. Labor Productivity is a key structural underpinning of any advanced economic system. We sense the fact that it is an undercurrent or foundational type piece of the system is why it is rarely viewed, discussed or reported on to the everyday investor/household. Regardless of this lack of common knowledge of the measure it is responsible for higher standards of living across the economic spectrum, higher levels of profitability for company’s at large (think stock market) and higher levels of hourly wages along with lower levels of price inflation. Those offer a wealth of deep underpinnings for the economic health of the system and the citizenry at large.

A visual for Labor Productivity is offered above.  This chart gives us a broad perspective for historical reference as it dates back to the late 1940’s.  With our most updated release on Productivity we see yet again for the most recent quarter (4th quarter 2022) the year-over-year percentage result came in negative.  This makes four consecutive quarters of negative year-over-year growth in this important measure.  With this, the entirety of 2022 posted negative results. This walks us back to 1974 which was the last time we had seen an entire year post consistent negative results which our red arrow identifies.  We had seen four consecutive quarters of negative growth in 1969 as it led into 1970 but those results were marginally negative.  In addition, 1979 into 1980 flirted with four consecutive quarters as well as 1982 but neither posted the consistent depth of negativity as well as consistent time of negative results. What is consistent among the various eras is the onset of recessions.  Consistent negative Productivity results do not guarantee recession but it adds to the risk factor with history offering a high correlation.  Consistently negative Productivity is the operative focus not just a mere negative blip on a quarter or two basis. Stock Market, Recessions and the 1973-74 Market Story Importantly, let’s keep in mind that the stock market is a collection of businesses.  It is not some magical place where any business listed within it is then automatically immune from all the business challenges that faces any non-listed business.  This may seem very obvious and yet, on a personal note, when listening to people generally and everyday investors specifically many times it seems as though it is viewed as some sort of magical place.  Kind of like, yes those are true business challenges but “the stock market will figure it out” type of responding tone. To be fair here they are correct in a sense when the central bank (Federal Reserve) “saves the day” for the stock market by cranking up the printing press and dropping interest rates dramatically (which has been so consistent in the previous couple of decades-plus it has its own succinct phrase known as the “Fed Put”) but that is very difficult to do in an entrenched price inflation era such as the 70’s and current day. The fact is recessions and businesses do not get along well together.  Simply put sales and profits become quite challenged as the receding economic backdrop unfolds.  As shared, when this occurs against a price inflation backdrop the central bank is much less able to enter the scene with easy monetary policies. 

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As shared in our first chart on Productivity the last time we seen such a consistently negative year-over-year percentage growth rate was back in 1974. Back then price inflation had been escalating in 1973 and in through 1974. The very weak Productivity was unable to offer a relief valve to businesses and households relative to what positively growing Productivity can do such as playing a role in increasing profitability, lowering inflation and increasing hourly wages net of inflation. Back then, for example, average hourly wages when factoring in inflation were negative for 32 straight months. Our current rate of negative wage growth rates comes in at 22 months and counting. With the above general backdrop back then a recession ensued which led to the stock market getting chopped in half over the 1973 through 1974 time period. Our chart directly above gives a visual of the time period with our black line identifying the top in 1973 with the downtrend unfolding through 1974. 2023 will be very interesting with the above in mind. To begin we really need to see Productivity growth rates turn upward and trend – that would be a tremendous structural positive as a starting point. If we continue our negative trends for Productivity we will be sailing in unchartered waters relative to this measure and with this a recession will be difficult to avoid especially when adding up the on-going financial damage the 22 straight months of negative wage growth rates are placing on households. Near-term projections nearly assure this streak will continue through coming months only adding to the challenges. For now, this little talked about and yet structurally important measure would offer a tremendous positive if we can see it trend consistently positive again. And speaking to price inflation itself, this week we will see updated information of the well recognized Consumer Price Index and all its sub-components. This will be a very important release and will continue to offer information to our price inflation/interest rate backdrop. Sounds like a fitting topic for our next edition. I wish you well…

Ken Reinhart

Director, Market Research & Portfolio Analysis


H&UP’s is a quick summation of a rating system for SPX9 (abbreviation encompassing 9 Sectors of the S&P 500 with 107 sub-groups within those 9 sectors) that quickly references the percentage that is deemed healthy and higher (H&UP). This comes from the proprietary “V-NN” ranking system that is composed of 4 ratings which are “V-H-N-or NN”. A “V” or an “H” is a positive or constructive rank for said sector or sub-group within the sectors.

This commentary is presented only to provide perspectives on investment strategies and opportunities. The material contains opinions of the author, which are subject to markets change without notice. Statements concerning financial market trends are based on current market conditions which fluctuate. References to specific securities and issuers are for descriptive purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. There is no guarantee that any investment strategy will work under all market conditions. Each investor should evaluate their ability to invest for the long-term, especially during periods of downturn in the market. PERFORMANCE IS NOT GUARANTEED AND LOSSES CAN OCCUR WITH ANY INVESTMENT STRATEGY.

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