Thursday is the last trading day before the week’s biggest event — the April jobs report, due out Friday morning.
The weekly report on initial jobless claims, as well as an update on worker productivity, will be the highlights of the morning.
On Wednesday we got two big earnings reports on the tech side, with Facebook (FB) reporting results that were better than expected, while Tesla (TSLA) reported a wider-than-expected loss but record quarterly revenue.
The Federal Reserve’s latest policy statement was released on Wednesday, and the central bank kept its interest rate policy unchanged while markets hardly reacted at all. In its statement, the Fed said weak economic growth seen in the first quarter was likely to be “transitory,” though economists noted that no strong signal about the future path of rate hikes was sent in the statement.
“The FOMC did not send a strong signal in either direction regarding the future path of hikes,” said Michelle Meyer, an economist at Bank of America Merrill Lynch.
Ian Shepherdson, an economist at Pantheon Macroeconomics, said another interest rate increase from the Fed in June remains “likely.”
How Donald Trump can fix productivity
As overall economic growth since the financial crisis has disappointed, increasing attention has been paid to low worker productivity.
Over the last five years, U.S. labor productivity has averaged just 0.6%. And while the economy has added about 16 million workers over that period, slow productivity implies these workers are not increasing overall economic output.
And over the last year, this number is even worse.
“Real GDP growth essentially equals the sum of productivity growth and employment growth,” writes Joe LaVorgna, chief U.S. economist at Deutsche Bank.
“Over the past year, nonfarm payrolls have increased 1.6% while real GDP has grown 1.9%. Hence, there has been a negligible 0.3% gain in productivity.
“With the unemployment rate at a relatively low level and trending lower, the pace of job growth is likely to decelerate further… consequently, for the pace of economic growth to accelerate, productivity will have to do the heavy lifting.”
For some economists, the lack of productivity is the outgrowth of a lack of innovation in the economy, an idea that falls broadly under the umbrella of “secular stagnation” and perhaps best captured in economist Robert Gordon’s book “The Rise and Fall of American Growth.”
LaVorgna notes, however, that in the late 1990s we saw a productivity boom alongside an unemployment rate that was below 5% and falling. The current unemployment rate is 4.5%.
In the late 1990s, the internet and computers were, in LaVorgna’s view, the major drivers behind the pickup in productivity. In the current cycle, the potential for productivity gains rests in Washington, D.C.
“In this cycle, we believe the driving force will be a shift towards pro-business policymaking,” LaVorgna writes.
“In particular, regulatory relief and corporate tax reform, including a substantially lower corporate tax rate and full expensing of capital outlays, should boost business spending… If the economy’s capital stock expands, productivity growth will improve and thus enable a faster pace of growth relative to what has been the experience over the last several years.”
An increase in productivity and resulting benefits to overall economic growth would, of course, be welcome news to President Donald Trump, who pledged a return to 4% GDP growth during the campaign.
And while Trump has been aggressive on passing executive orders aimed at reducing regulations, tax reform requires cooperation from Congress and legislative initiatives have so far eluded the administration.
Now, some economists, including Rick Rieder at BlackRock, have argued that there is a measurement issue in terms of how the government is accounting for the changes we all know are taking place in the economy.
“We don’t capture technology efficiently in GDP,” said Rick Rieder, the global chief investment officer of fixed income at BlackRock. “Vehicle miles traveled are at all-time record. Gasoline consumption, all-time record. Air miles traveled, all-time record. Auto sales running at 17.5 million cars [per year]. Meaning, the number we get through GDP, it’s just not calculated right. And it just lags what’s changed in the way that the economy works today.”
In other words, the slow growth and depressing productivity numbers we’re seeing reported may be underselling the overall strength of the economy.
But even so, LaVorgna sees parts of the Trump agenda serving as an answer to one of the most persistent economic problems we’ve seen in the U.S. over the years.
Myles Udland is a writer at Yahoo Finance. Follow him on Twitter @MylesUdland
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