According to pieces of data released by the US Bureau of Labor Statistics in early November, output grew 2.1% in the third quarter, while hours worked increased 2.4%. The subsequent 0.3% decline in productivity was its first deterioration in two years, which triggered concerns among investors. We try to put this in perspective.
First of all, we would advise to beware of early estimates. Productivity is a complex thing to measure, and the preliminary estimate has not always been very reliable. BLS typically revises it twice, respectively 30 days after the first release and another 60 days later. Large corrections are not exceptional. In 3Q 2016, the initial estimate pointed to a 3.1% productivity gain, which was finally cut to 1.4%. On the contrary, in 1Q 2015, a preliminary number of -1.9% became a final figure of +2.9% (source Refinitiv). So, stay tuned for the more reliable first update on December 10.
On a more fundamental side, one should keep in mind that, admittedly, productivity has been growing more slowly in the last decade in the USA. Part of that is probably related to the efforts made by companies to meet the new standards pushed by ESG expectations, especially regarding social matters. Another explanation is that productivity gains have always been cyclical, and driven by technical innovation. The internet and, more generally, the development of IT in the late 90’s triggered a long-lasting momentum, which was extended by mobility technologies. The more recent developments happened to have a less direct impact on productivity (eg cloud solutions) or only play in specific sectors (eg automation in warehouses and omni-channel solutions in retail). Innovation continues, though, and the cycle will resume with the next major innovations, whichever they are (5G might be one of them).
Our bottom-up analysis also confirms that productivity remains a key focus point for company leaders in the USA. There were many illustrations of this mindset in the latest quarterly earnings season, and we picked a few examples within our portfolio, to illustrate the variety of initiatives:
– in general merchandise retail, Target observed “productivity increases of close to 60%” in its stores’ management of online orders (“pick, prep, pack and ship”). They stated that they had “significant runway” ahead of them as a result of emphasized investment in technology, process and training.
– another retailer, the consumer electronics specialist Best Buy, stressed that they expected their in-home advisors to become more productive as the company enhanced its digital tools and CRM systems.
– Iqvia (which specializes in information and services to the drug development sector) reported a 30% productivity improvement in the recruitment of candidates for clinical trials, compared to historical benchmarks.
– in transportation, Union Pacific, which is only at the beginning of a complete revamp of its freight train scheduling, saw an 18% improvement in locomotive productivity, and expects even bigger changes to take place in 2020.
For decades, Corporate America’s managers have been weathering soft patches in economic cycles through productivity gains… and continuing to control costs when the recovery was there. We trust that their creativity in this respect is intact, and will remain one of the key drivers of earnings growth in the US market.
Graphene Investments – November 28, 2019