American workers are becoming more productive.
Average revenue per employee at S&P 500 companies hit a record high in February, according to a recent Bank of America analysis. After 15 years of no profit. This is one of several signs that labor productivity, which slumped in 2022, is recovering.
Some on Wall Street believe that trends in labor productivity could help the stock market survive stronger-than-expected inflation that has emerged as a concern in recent weeks.
“If productivity increases, [companies] “You can cut costs and improve profit margins, which is why companies are so focused on improving productivity,” Oson Kwon, U.S. and Canadian equity strategist at Bank of America, told Yahoo Finance. That's what I'm focusing on.” There are a lot of macro headwinds going on. So they're trying to find ways to increase productivity and offset headwinds. ”
Headwinds Kwon mentions include the risk that the Federal Reserve will hold off on cutting interest rates as the downward path for inflation continues to prove steeper than initially expected. Two separate reports released this week showed that inflation was higher than economists expected in February. Annual wage growth for the month also exceeded the level that economists say the Fed wants to see to be confident that inflation is falling to its 2% target.
But researchers at the Carson Group argue that productivity gains could offset these concerns.
Ryan Detrick, chief market strategist at Carson Group, told Yahoo Finance: “Inflation is likely to return as productivity continues to rise and is expected to continue to do so. There's no need to worry about that. It's not really that way.”
Detrick's colleague Sonu Varghese explained that sustained wage increases could cause inflation problems if consumers have more money to spend on goods. As workers earn more money, the demand for goods increases, resulting in higher prices. However, as productivity increases, this paradigm changes. In that case, businesses would produce more products, and the economy might be able to sustain higher wages. If both demand and supply of goods recover, prices can remain stable.
Varghese highlighted two different cases where wage growth rates have skyrocketed. Wage growth accelerated in the 1970s, but productivity did not and the country continued to struggle with persistent inflation for a decade. In the 1990s, rising wage growth was accompanied by a productivity boom, followed by a steady expansion of both economic growth and stock market gains in the United States.
Neil Dutta, head of economic research at Renaissance Macro, told Yahoo Finance that higher productivity would extend the overall trajectory of U.S. economic growth.
This is welcome news for stocks.
Companies can choose to use the increased financial benefits from productivity in a variety of ways. One would be to keep raising wages to attract more workers. However, recent changes in the labor market indicate that this is likely not the case.
The labor market is showing signs of softening, and the large wage increases needed to attract workers to the post-lockdown job market have eased. The turnover rate, a sign of worker confidence, hit its lowest level in January since August 2020.
This indicates that companies use the additional revenue gained from increased productivity to improve their profit margins. Improving profit margins typically provide a tailwind for future corporate profits and, in theory, boost stock prices.
All of this is said without mentioning artificial intelligence, which has been hailed as having the potential to improve productivity.
“AI is kind of the cherry on top,” Kwon says. “It's clear that AI will greatly improve productivity. We don't know when that will happen, but we think it will happen and that it will significantly improve productivity.”
Josh Schafer is a reporter for Yahoo Finance. Follow him on X @_joshschafer.
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