Productivity growth has been trending down since 20047 and is a significant contributing factor to today’s low-growth environment. There’s a wide range of theories as to why productivity is in secular decline. Weak business investment, which has underperformed during this expansion, is an obvious culprit holding back a productivity-related boost to potential output.
We will be watching: Monthly durable goods orders and shipments data offers a timely update of business investment. Under the newly passed Tax Cuts and Jobs Act, the corporate tax rate will be cut from 35% to 21%. We will be watching to see whether companies put that extra cash to work in the form of capital expenditures.
Risks to our view: A risk does not have to be a negative! The risk here is that businesses become less cautious, sharply increase investment spending, and spur more broad-based growth in our economy. Because trend productivity is critical, productivity growth would have to recover for several years to return to the 2.2% trend seen from 1950–2000.8 Yet a robust improvement would signal potential growth could be moving up out of its stagnation.
7 U.S. Bureau of Labor Statistics, based off a 5-year moving average.
8 U.S. Bureau of Labor Statistics.
This information is educational in nature and does not constitute a financial promotion, investment advice or an inducement or incitement to participate in any product, offering or investment. FS Investments is not adopting, making a recommendation for or endorsing any investment strategy or particular security. All views, opinions and positions expressed herein are that of the author and do not necessarily reflect the views, opinions or positions of FS Investments. All opinions are subject to change without notice, and you should always obtain current information and perform due diligence before participating in any investment. FS Investments does not provide legal or tax advice and the information herein should not be considered legal or tax advice. Tax laws and regulations are complex and subject to change, which can materially impact any investment result. FS Investments cannot guarantee that the information herein is accurate, complete, or timely. FS Investments makes no warranties with regard to such information or results obtained by its use, and disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information.
Any projections, forecasts and estimates contained herein are based upon certain assumptions that the author considers reasonable. Projections are necessarily speculative in nature, and it can be expected that some or all of the assumptions underlying the projections will not materialize or will vary significantly from actual results. The inclusion of projections herein should not be regarded as a representation or guarantee regarding the reliability, accuracy or completeness of the information contained herein, and neither FS Investments nor the author are under any obligation to update or keep current such information.
All investing is subject to risk, including the possible loss of the money you invest.