Weekly Market Commentary

August 18, 2021

The Fed and Productivity

Are we there yet?

For months, investors have wondered when the Federal Reserve (Fed) might begin to “normalize” its policies, a process that will eventually lead to higher interest rates. Last week, a better-than-expected unemployment report – showing a gain of almost a million jobs – sparked speculation about whether we’ve arrived at that point.

When the pandemic arrived, the Fed adopted policies that stimulated growth. It cut short-term interest rates to zero and began buying Treasuries and agency mortgage-backed securities to keep long-term rates low, too. Low rates make borrowing less expensive for businesses and individuals so that made sense.

In late July, the Fed said it would continue to keep rates low until it saw “substantial further progress toward maximum employment and price stability goals.”

If July’s employment numbers satisfy the Fed’s expectations for progress on jobs, the Fed may begin the process of normalizing monetary policy. The first step would be purchasing fewer bonds, a practice known as tapering. Until then a lot of companies are exceeding earnings this current reporting period.

WHAT’S MAKING US MORE PRODUCTIVE? While the United States has not yet recovered all of the jobs lost during the pandemic – 22 million were lost and 16.6 million have returned – productivity is higher than it was when more people were employed.8 The Economist reported:

“Though output reached a new high in the second quarter, employment remained more than 4 percent below its pre-pandemic level. At present, America is producing more output than it managed just a year and a half ago, with roughly 6 [million] fewer workers.”

Higher productivity undoubtedly reflects the ingenuity of American businesses. The pandemic forced companies to find ways to remain productive. In response, many adopted new technologies, implemented new patterns for working, and changed their business models.

However, not all companies have experienced gains in productivity. Those that proved to be the best at managing time, talent and energy – the top 25 percent of companies – were 40 percent more productive than other companies. (The productivity of companies in the lower quartiles was averaged to make the comparison.)

Not all sectors of the economy are equally productive, either. “The surge in output per worker also reflects the changing mix of the workforce. Employment in the leisure and hospitality industries, where productivity tends to be low, remains about 10 percent below the pre-pandemic level, compared to a 3 percent shortfall in the higher-productivity manufacturing sector,” reported The Economist. As less productive sectors recover, productivity may return to previous levels.

Focus On The Positive

“Whenever you are asked if you can do a job, tell’em, ‘Certainly I can!’ Then get busy and find out how to do it.” —Theodore Roosevelt, 26th president of the United States