Disappointing employment growth in March and downward revisions to prior monthly reports signaled the economy lacked momentum. But consultant economist, Dr. Vince Malanga of LaSalle Economics, Inc. is encouraged by growth in productivity and says it has “several positive implications.”
Malanga says a rise in productivity is often associated with period of rising defense spending and he sees signs in place to suggest the downward trend in productivity growth is behind. “Broadly it suggests a pick up in the economy’s underlying growth rate may be about to commence. Second, higher productivity would positively affect the quality of profits and the outlook for business investment,” he says. “Third, by reducing pressure on unit labor cost it would allow for accelerated real wage gains without sacrificing price stability.”
Seeing the benefits of productivity growth would reduce cyclical pressures on interest rates and ease pressure from monetary policy, adds Malanga. “An absence of inflation implies a lower-than-expected neutral short-term interest rate and less pressure on long-term interest rates that might arise from a step up in demand growth,” adds Malanga. “This means that aside from possible political considerations, the Federal Reserve would have less incentive to achieve rate normalization by January, 2018, when Chair Yellen’s term expires. It would also suggest that while the Fed’s balance sheet has exploded over the past eight years, it is currently causing little if any market distortion and need not be adjusted aggressively.”
Malanga hopes the Trump administration fills the Federal Reserve Board vacancies to nullify any pressure policy changes that could inhibit growth. “The Fed’s history is to usually tighten policy at least one too many times. It would be a shame in our view if this were to occur before a stimulus agenda could be enacted,” he adds.
