Market Musings 30/10/21:
Invest, Innovate and Improve
Recent podcasts you may care to listen to:
Productivity: a new golden age, or a wage inflation spiral?
The COVID-19 pandemic has been an electric shock to the global economy: it is fundamentally changing our ways of life and of work. People may talk of a return to normal, but what does that really mean today? I believe there are structural shifts that have been put into motion or accelerated by the pandemic and lockdowns.
Governments are spending much more money today than pre-pandemic, with a focus now on investment on essential infrastructure including renewable energy, transport and health care. The fact that the cost of borrowing is so low for governments (historically low bond yields) lowers the hurdle for spending on infrastructure investment, after years of under-investment in the wake of the 2007-09 Great Financial Crisis.
But equally well, companies are also being obliged to invest more for the first time in a decade or more, as:
- supply chain disruptions caused by the pandemic incentivise companies now to “near-shore” more of their sourcing and production in order to make their supply chains more robust.
- Investment in technology to enable widespread remote working has been a second huge required area of investment, while
- burgeoning wage inflation in a number of industries from burger-flipping to dockers and HGV lorry drivers is emerging as a result of labour shortages, and driving companies to invest to offset these wage pressures via higher productivity and automation where possible.
Since 2015, US corporate investment was flat, while assets and profits grew
Source: St Louis Fed FRED database
In the US, non-financial companies in aggregate have grown assets by 46% and pre-tax profits by 53% from Q2 2015 to Q2 2021, while over this six-year period, corporate investment has not increased at all.
The result of this is that, in the US at least, the combination of cost control and very modest wage growth has driven unit profits per employee up by over 6% per year on average since 2009. Quite simply, companies didn’t need to invest more to achieve good profit growth, as wage growth was well-contained and revenues were growing much faster.
Unit profits per employee have grown…
