As I’ve stated many times before, US economic growth has been slower in this century than the last. Why is this?
Growth in any given year means more goods and services are produced this year than the previous year. How can growth happen? You either need more workers to be able to produce more or develop productivity “tools” that enable your current workers to produce more. Growth is typically made up of both factors.
Economic growth has been slower in this century mostly due to the first factor. With declining birth rates in the US, there are less workers available to increase the workforce to produce more.
Recently, there has been a boost in the second factor of economic growth. This may be only temporary, but any productivity gains that can offset the decline in birth rates is a positive outcome for economic growth and subsequently, the stock market.
The following is an article on this productivity growth written by JP Morgan, one of the Portfolio Strategists we utilize for client accounts.
As an old proverb goes, necessity is the mother of invention, and the severity of the pandemic accelerated a technology boom that has boosted productivity. After decades of stagnant productivity growth in the U.S., we estimate that real output per worker rose by a lofty 4.1% annualized from the fourth quarter of 2019 to the second quarter of 2021. This likely reflects many of the genuine efficiencies realized by firms and consumers in the pandemic economy. Workers have trimmed their commuting times and logged in more hours, as rapid economic growth coincided with chronic labor shortages. Firms were forced to pull forward technological advancement to facilitate widespread remote work, and the pressures of the pandemic forced many businesses to rethink their operating models to become more efficient and agile. A general switch to goods consumption from services consumption likely further boosted productivity numbers.
While we expect to lose some of this productivity boost as we return to our pre-pandemic routines and the consumption of services recovers, some of it could stick around, particularly in regards to continued remote work and increased automation. Whether this will be enough to spur further productivity growth in the years following the pandemic remains a question, but the level increase of productivity has been genuine and helps explain the extraordinary profit growth and at least some of the impressive stock market gains we’ve seen during the pandemic recession.