A Framework That Provides Clarity

During periods of “low visibility,” confusion reigns: for every indication of one trend, there seems to be a countertrend. The key is to glean from the collective wisdom of reliable leading indicators a clear signal that the economy is headed for a turn.



Pinching Productivity

There’s a widespread expectation, based on President-elect Donald Trump’s statements, of major tax reforms that incentivize corporations to repatriate trillions of dollars in profits stashed overseas, and invest that money within the U.S. Whether this is likely to happen in practice is a key question. For example, when asked earlier this month what his firm – one of the biggest potential beneficiaries of such tax reforms – would do if it could repatriate overseas capital, Cisco Systems CEO Chuck Robbins said that the money would be used for “a combination of dividends, buybacks, as well as M&A activity.”

The results of the Q4 2016 Business Roundtable CEO Survey suggest that Mr. Robbins’ cohorts may agree with him. Because it was conducted between October 26 and November 16, the survey reflects post-election expectations only in part. Even so, it’s notable that the percent of CEOs planning to increase hiring popped up to a one-year high (blue line in chart), but the percent planning to boost capital spending actually declined (red line).

The jury is still out as to what corporations will actually do in response to Mr. Trump’s policies. But if it amounts to more hiring and less capital spending, as the recent survey suggests, that pincer movement shown in the chart would be problematic for productivity.

Please recall that – as we explained in a paper published last summer – the key reason for the productivity growth downshift following the Great Recession is that, after being in the ballpark of 1%, more or less, in the entire post-World War II period, the contribution of capital intensity turned negative following the recession despite cheap money. Because the ratio of capital to hours worked defines capital intensity, greater hiring coupled with less capital investment – as suggested by the CEO survey – would damage, not bolster, this critical driver of productivity growth.

In essence, without a revival in the contribution of capital intensity, we can’t expect much of a recovery in labor productivity growth. Given the simple math we’ve long highlighted – potential GDP growth equals potential labor force growth plus labor productivity growth – sustained strength in GDP growth would require a major pickup in productivity. And that won’t happen unless businesses make major productivity-boosting investments.

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