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This Large Macro Economic Underpinning Continues Negative

CAMS Weekly View from the Corner – Week ending 12/9/2022

December 12, 2022

One of the hallmarks of an advanced economic system (which gets little attention by the masses in light of its deep underpinnings) is the ever increasing productivity of a society.  As the society continues on through innovation, capital investment in its operations and execution of operational efficiency in you-name-it endeavor(s) the society becomes ever more productive.  This in-turn leaves in its wake a host of positives for the society at large all the way down to the everyday household. The bottom line of the process is more goods and services are produced in less time which allows for lower prices of X goods and services as well as higher wages in the creation of those goods and services.  It creates a positive upward spiral known as increased standards of living.  Simply, a society becomes wealthier as a whole. There are a wealth of tributaries begging to be delved into upon opening up a topic such as this but being these editions are primarily meant to take a look at the big picture of whatever the topic we will stay with the larger view here. Unit Labor Costs Keeping at a high level here if X endeavor can produce more of its goods or services in less time then wages can be profitably increased by the entity at large because they are producing more output in less time than before.  At the individual level they are turning out more and more goods or services and hence are more valuable to the process.  This ever increasing efficient production allows for wage increases while at the same time the entity in X endeavor can be ever more profitable in light of the increased production by all participants.  A win-win – companies experience higher profits while wage earners experience higher wages and the consumer within experiences lower prices relative to their increased wages. The phrase – Unit Labor Costs – captures this in indentifying what the costs are of labor for each piece of output.  If those costs remain low because productivity (think efficiency of producing) is high then it is a win-win.  What if those costs move notably upwards because productivity is trending in a negative direction?  Here the profitability of X company(s) is at risk of decreasing rather than the expected increase in which positive productivity typically brings.  This unless X company can pass those increased Unit Labor Costs on through to their consumers which then begins the negative wheel for society at large in that consumer prices rise ever higher, in particular relative to wages households are receiving as income.  In such a scenario, given enough time, we see said society experience the negative wheel of decreasing Productivity which leads to lower profits, more expensive consumer items and wages that become ever more challenged when thought of in terms of their actual purchasing power.

To add a visual to the above description we have a multi-decade chart depicting Unit Labor Costs for the 3rd quarter which was released last week. Per our red circle, which is now encompassing a few quarters of multi-decade high levels, we can see said costs for the business community at large remain quite elevated. Productivity Itself

A central tenant in the above discussion is Productivity itself which was also updated last week for the 3rd quarter of 2022.  Our red circle depicts a multi-quarter, multi-decade low level of business productivity.  Productivity has negative readings for the entirety of 2022 at levels we have not experienced since the early 1980’s which our red arrow points to.  Interestingly, our current experience is more challenging than back then as currently 4 out of our 5 previous quarters have been negative in overall Productivity growth. Comparatively, back in the early 80’s there was a 3 quarter negative read which quickly went positive.  In addition, our current experience has been deeper in negative territory.  From a multitude of economic perspectives we need to see this overall Productivity growth turn back positive.  It has been relentlessly negative on a trend basis. Stock Market Productivity is a centerpiece of building profitability for businesses.  Healthy profit margins and net profits are the lifeblood for increasing the value of a business.  When increasing both measures – in the case of publicly traded companies within the stock market – market participants are willing to bid up their shares in light of the profitability trend.  Importantly, participants also need to see a relatively clear path ahead for X business to continue with increasing profits. The above charts depict the negative storyline unfolding for Productivity within the U.S. Business sector.  This is important for the nation at large (foundation piece of rising standards of living) for individual households (foundation piece for rising wages and lower consumer prices) and for the business sector (key ingredient to raising profit levels while offering products and services at lower prices.)  In addition, this is important to the investor class as this foundation piece is a key ingredient in making public companies more valuable in light of consistently increasing their profit margins and overall profits. Negative Productivity that is trending as such offers a poor collective backdrop on the increasing profit front for the stock market as a whole.  This is yet another indicator suggesting our stock market may be challenged for some time to come.  In addition, this also offers price inflation along with real wages (wages net of price inflation) will continue to offer challenges. As offered, negative Productivity, in particular on a trend basis brings all segments of society downstream financial health issues. 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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