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This Relationship is Key to Collective Prosperity

CAMS Weekly View from the Corner – Week ending 5/3/2019

May 6, 2019

This past Thursday the Bureau of Labor Statistics released two important data pieces that always offer important insight into the structural backdrop of the U.S. economy.

The two measures released were Business Sector Productivity and Business Sector Unit Labor Costs.  These can sound complicated but let’s keep them simple.

When businesses (think all employees) continually become more productive they are able to create their products quicker and more efficiently.  When doing this they are able to produce more product than before in the same amount of time.  With this the company, or collectively speaking –  the economy becomes more productive.

The more that is produced within the same amount of time allows for the products to be produced at a cheaper “per unit” price.  This simply means that each product created is produced at a lower cost level than what it would have been produced at before the increase in Productivity.

For an economy as a whole this is where the prosperity “magic” begins to take hold.  As products are created more efficiently all employees are able to receive higher wage growth rates than what would have been otherwise affordable by businesses before the increased levels of Productivity.

Importantly, at the same time of increasing pay rates the business itself is also able to increase their profits at higher rates too.

With the above everybody wins in the increased prosperity storyline.  If the Productivity levels for the economy as a whole continue to increase at growing levels, over the course of numerous years, then we see notable increased levels of prosperity for the economy overall.

Sadly, in the last decade-plus consistently strong Productivity levels had been absent in the economic storyline and the lack of overall prosperity reflected this.  Per our red circle below, this has changed.


Click For Larger View:   https://fred.stlouisfed.org/graph/?g=nQeo The blue line above reflects the aforementioned Productivity growth rate compared to its year-ago level.  The red line reflects the Unit Labor Cost compared to its year-ago level.  The two red arrows highlight the excellent trend of both.

Keeping it simple; if we were writing an “increased prosperity script” for an economic backdrop the current relationship of those two arrows is a powerful duo in said script.

In a longer run sense, witnessing the blue line (Productivity) trending nicely and remaining solidly above the red line (Unit Labor Cost) would be an ideal backdrop.

The change in relationship of these two lines highlighted with the red circle goes a long ways in supporting our historically highly valued markets.  Said market needs to see more of this going forward.

I wish you well…

Ken Reinhart

Director, Market Research & Portfolio Analysis

Portfolio Manager, CAMS Spectrum Portfolio

Footnote:

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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