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Here's What the U.S. Needs to Focus On: Zacks May Market Strategy

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The following is an excerpt from Zacks Chief Strategist John Blank’s full May Market Strategy report To access the full PDF, click here

The U.S.-China trade war is being cast as a “Big Solution” for the USA.

I want to turn to the real Big Topic: the internal struggle to deliver higher U.S. Productivity Growth. This is where more focus needs to be – right now – not the China global growth distraction.

Here’s U.S. Manufacturing Sector Labor Productivity from 1988 to Q1 2017. Yes. This is weak right now and across the entire current business cycle…

Here’s U.S. Manufacturing Real Output, shown in percent change at an annual rate, also starting back in 1988. This is weaker now, relative to past cycles…

Now, look upon U.S. Manufacturing Sector Capital Intensity: the next chart shows Capital Intensity, from 1985 to Q1 2017. The intensity change is anemic…

Note: this form of U.S. capital intensity surges near the end of the last 2 cycles.

The latest stronger U.S. productive data, in other words, may be a sign the cycle is near an end this time, too.

Productivity 101

One measure of productivity is labor productivity, which can be measured as gross domestic product (GDP) per worker.

By this measure, the growth of labor productivity was low in the 1970s. Between 1980 and 2000, this growth accelerated.

But then, it has slowed since 2000.

  • "It is interesting to note that the current state of low labor productivity growth is comparable to that of the 1970s and that it results from a decline that started before the 2007 recession,” St. Louis Fed economist Vandenbroucke wrote.
  • How does a worker’s age affect an individual’s productivity? According to economic theory, young workers have relatively low human capital; as they grow older, they accumulate human capital, according to Vandenbroucke.
  • "Human capital is what makes a worker productive: The more human capital, the more output a worker produces in a day’s work,” the author wrote.


Part of the current productivity problem is U.S. workforce composition, struggling with experienced Baby Boomers retiring in greater numbers.

Next, I show excerpts from a NY Times “Why is Productivity So Weak” article done on April 26th, 2016.

A More Depressing Scenario

The productivity slowdown is real, and it’s not going away.

  • Earlier waves of innovation in technology (a computer on every office worker’s desk, for example) and management strategies (like outsourcing noncore functions) have been fully put into place across corporate America, and so are no longer increasing productivity.
  • Add to that a slowdown in capital spending by businesses since the 2008 recession, which means workers aren’t getting better equipment or software that might help them do their jobs more efficiently.
  • Moreover, if you believe the theory about low-productivity workers being more likely to lose their jobs during the recession, the people returning to the labor force now may be less effective at boosting economic output for each hour they put in.
  • In the depressing scenario, Americans’ standards of living are just going to grow more slowly in the future, and there’s not much we can do about it. Fortunately, this isn’t the only possible one.

A Neutral Scenario

Maybe we just aren’t counting things right — or, to use the economists’ preferred term, there is measurement error.

  • After all, entire industries are being transformed in ways hard to account for in data on GDP, particularly in technology and services. Having a high-powered computer in our pockets and social networks that let us stay in touch with friends may make us better off than the narrow math of GDP— which counts only what we pay for — would suggest.
  • Still, it’s not clear why these nonmarket gains in quality of life would be so different now than they were in earlier generations when, for example, videocassette recorders became widespread or the air became cleaner thanks to environmental regulation.
  • The issue is not whether there’s bias,” wrote the economists David M. Byrne, John G. Fernald and Marshall B. Reinsdorf in a paper on measurement issues in productivity at the Brookings Papers on Economic Activity this spring. “The question is whether it’s larger than it used to be.”
  • Their conclusion, after examining tech and other measurement issues, is that it isn’t. That said, the tools that statistics-keepers use to measure the economy are never perfect, so there could be problems not yet understood that are creating a false impression of a productivity drought.

The Happy Scenario

  • Think about a business that is investing for the future. It hires a bunch of people and opens new offices and builds new factories. But while it is doing all that stuff, its actual productivity is quite low. It has a lot of people working a lot of hours, but very low economic output until its operations are fully up to speed.
  • Maybe, just maybe, that is happening with the United States economy writ large. Businesses are adding workers in preparation for the future, but it will take time for their investments to pay off in terms of gross domestic product.
  • There’s a recent precedent for that pattern. In the late 1990s, the stock market was booming and companies were making huge investments in staff, equipment and information technology. But reported productivity growth was actually below the long-term trend — only about 1.7 percent a year from 1993 to 1998, for example. Then it began soaring in the years that followed, particularly in the early 2000s.
  • But here’s one piece of evidence that the pattern of the 1990s is not what is afoot today: Business investment spending on equipment, intellectual property and structures is low relative to the size of the economy. You’d expect those numbers to be higher if this was just a productivity lull as the economy waits for big investments in the future to pay off.
  • Still, there could be enough going on below the surface of those overall numbers that the optimistic case remains plausible. To use one example, engineers at several companies are hard at work trying to perfect driverless cars. At present, they are a sap on productivity — they put in many thousands of hours of work with no economic output to show for it. But if successful, their work could radically increase the nation’s productivity in the decades ahead.
  • Apply the same across a wide range of fields — industrial goods, pharmaceuticals and medicine, financial technology firms — and optimism becomes more plausible. That’s the scenario we should all hope is occurring: Slow productivity growth now is just a down payment on a much brighter future.

Finally, a widening internal U.S. productivity growth gap has led to current U.S. political divisions.

At the Labor Department, productivity is measured by comparing labor input (hours worked) to a sector’s output (in dollars).

At the regional scale, Brooking economists Joseph Parilla and Mark Muro use metro-level output from Moody’s Analytics and this employment data from the Bureau of Labor Statistics to estimate local productivity.

In doing so, they observed massive variations across the U.S. economy, from an average of $299,000 per worker a year in Midland, Texas to $38,000 per worker in Jacksonville, North Carolina.

  • According to their research, the largest U.S. cities tend to be the most productive areas, along with areas in the energy belt that specialize in oil, gas, and mining.
  • The low end of the productivity spectrum consisted of smaller cities in the southern and southwestern U.S.
  • These findings aren’t that surprising given that cities and boom towns tend to be more productive.

San Jose, California ranked as the nation’s most productive metropolitan area, with labor productivity growth at 2.7 percent between 1978 and 2015.

During the period between 2004 and 2015, the researchers saw that even the most productive areas of the U.S. couldn’t escape the productivity slowdown, unless the area was the site of the energy or tech boom.

Beyond those two sectors, only small cities that had major research universities saw productivity growth of greater than 1 percent a year.

What of productivity solutions in suffering U.S. (and global?) regions! That is not what we are hearing from politicians in either party!

As for what policy makers should do, Muro and Parilla suggest policies that help with the high cost of housing in these productive regions, to remove the barrier of entry for workers to move to these highly productive cities.

But more important is boosting productivity in regions that have been suffering.

How to do that, though?

That is a much more complex question.

Enjoy the rest of Zacks May market strategy report.

Warm Regards,

John Blank

Zacks May Sector/Industry/Company Telescope

At 2,933 on the S&P50 on May 3rd, this market was -1% from its 52-week high at 2,961. Tactics for stock outperformance is at an industry level, not a sector level.

Top sectors are Health Care and Industrials at Very Attractive, and Consumer Staples and Utilities at Attractive.  3 are defensive. 1 is late cyclical.

What is going on?

The HMO enrollment boom continues, despite Bernie Sander’s “Medicare for All” slogan. Business Products and Aerospace & Defense are big niches for Industrials.  Utilities-Water Supply and Food are new hot industries to look into.

Want more industry ideas inside Market Weight sectors?

  • In Financials, just look into Investment Funds and Investment Banking & Brokering.
  • Info Tech stayed at a Market Weight this month. Yet notably, Computer Software is strong.
  • Energy was a Market Weight. But Exploration & Production looks great.

Finally, Materials marked up an Unattractive showing. But Metals Non-ferrous continues to outperform.

(1) Health Care moved up one notch to Very Attractive from Attractive. The leader (with strong demographics) is Medical Care again.

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(2) Industrials moved up one notch to Very Attractive from Attractive. The leaders are Aerospace & Defense and Business Products.


(3) Communication Services fell back to Market Weight. Telco Services looks average.

TOP ZACKS #1 RANK STOCK: Comcast (CMCSA - Free Report)

(4) Financials fell back to Market Weight. The two leaders are Investment Funds and Investment Banking & Brokering.

(5) Consumer Staples moved back up to Attractive from Market Weight. The leaders are Misc. Staples and Food.

(6) Consumer Discretionary remains a Market Weight.  The surprise new leader is Publishing. Apparel and Media are strong too.

(7) Utilities move up to Attractive from Market Weight. Water Supply is the new leader.

(8) Energy stayed at Market Weight. The new leader is Exploration & Production.

(9) Info Tech stayed at Market Weight. The best stocks are a strong call on Computer-Software Services and Office Equipment. Semis stayed at a neutral industry rank.

(10) Materials rose to Unattractive from Very Unattractive. Metals Non-ferrous industry is a durable bright spot. Tariffs for steel also appear to play a role for Steel.

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