Has the Fed been reading our commentary?
On Wednesday, September 21st, the Federal Reserve decided they didn’t need to raise the federal funds rate…yet…but did signal that it still expected to raise them before year-end.
As opinions dissent inside the FOMC – several members have sited all kinds of reasons and arguments both for raising rates and for leaving them alone.
But, quite simply, a common theme coming from their meetings has been that there’s still some economic issues that we can’t overlook. Wage growth, political motives, business spending, real estate valuations, financial stability and productivity growth are areas identified during this last meeting.
Well…seems as though the FOMC has maybe been reading some of our research commentaries! Not literally, obviously, but looking back a few weeks to mid-August, Director of Market Research, Ken Reinhart wrote the following:
Excerpted from CAMS Weekly Views – Week Ending 8/12/2016:
US productivity unexpectedly drops for a third-straight quarter
Tuesday, 9 Aug 2016 | 8:30 AM ET
U.S. nonfarm productivity unexpectedly fell in the second quarter, pointing to sustained weakness that could raise concerns about corporate profits and companies’ ability to maintain their recent robust pace of hiring.
The Labor Department said on Tuesday that productivity, which measures hourly output per worker, dropped at a 0.5 percent annual rate in the April-June period. It was the third consecutive quarterly decline.
On the economic analysis front we did have an important structural input for the broad economy and stock market via the U.S. Productivity release. As offered in our header quote the news was quite weak. Most concerning is the duration of weakness with this being the 3rd consecutive quarter of negative productivity growth. This length of negative results is a bit similar to our often stated concerns of the lack of earnings growth for the collective S&P 500 companies which has spanned more than a year now. The above is not good news for stock market investors because it represents poor structural underpinnings to building greater wealth as a nation.
Prolonged negative productivity growth can place upward pressure on Unit Labor Costs – the cost companies experience per unit of output. If their per unit costs are moving higher this impacts profit margins negatively. Weakening profit margins (something else we have been seeing along with said lack of earnings growth) impact companies abilities to increase their bottom line profits for a given level of sales. Profits are truly the lifeblood of company growth over time if stock prices are to go higher consistently. This is the economic version of the hip bone is attached to the thigh bone. It’s all connected and plays an important role in the overall health of the economy and the stock market.
Underneath the lack of productivity is the down trending levels of Capital Investment – a structural underpinning of productivity growth. As more capital investment is deployed it increases the productivity of the workforce and reduces unit labor costs over time. For my part the Capital Investment theme has been an on-going concern so it is not a tremendous surprise we are seeing lower productivity. Capital Investment levels have been declining since the fall season of 2014! If these trends continue we can expect more concerning news on the U.S. Productivity front over time.
Rising stock prices do not make a country wealthier. Rising stock prices should reflect growing wealth that is taking place in a country. Capital Investment and through this rising productivity are basic underpinnings of growing wealth. For my part, the lack of both has been an on-going concern. In near-term Weekly Views we will look at Capital Investment more and the lack of growth in this important area.
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