On Productivity, The Fed And Taxes

Last week was one of the most important weeks from an economic standpoint in some time, with announcements on the new Federal Reserve (Fed) chair, more details on the Republican tax legislation that is pending and a slew of economic releases. We were privileged to speak with chief economists Constance Hunter of KPM, and Brian Wesbury of First Trust Advisors on our “Behind the Markets” podcast. These are the takeaways:

Constance Hunter on Productivity

The productivity print came in higher than expected due to gross domestic product (GDP) data coming out higher than expected. Hunter’s role at KPMG entails consulting with clients, and every CEO, CFO, and CTO she meets with is focused on enhancing productivity throughout their organizations. With that focus, you would think productivity would come. Why were we in a productivity funk? Hunter believes that’s partly due to our economy’s transition to a service-based economy where things that used to count as investments in GDP are now counted as service purchases (cloud computing is an example). This is a big element of where Hunter sees spending. If this is not counted as investment in GDP accounting, this will depress productivity statistics as well.

The trends in productivity from peak to trough, while averaging 1.8% over the last 50 years, often are driven by trends in labor scarcity. Constance plots this data using surveys from the National Federation of Independent Business. Intuitively, this makes sense. When labor is hard to find or expensive to find, necessity becomes the mother of invention.

Why are wages being suppressed? Perhaps it is a compositional effect of the labor force—higher-paid baby boomers are retiring and that may be depressing aggregate wage figures. We’ve had 85 consecutive months of job gains—which is the largest stretch in post-World War II data by over 50%. Hunter released a chart on Twitter showing how the type of jobs and level of wages in jobs correlate with wage gains. Big job categories like professional services and health care have above-average incomes but not big gains in wages, while leisure and hospitality are seeing bigger gains but from a low base.