Don’t overlook the role of disappointing productivity figures as a spark for Thursday’s stock-market selloff, a veteran Wall Street strategist said.
“Contributing to the stock-market selloff today was more bad news on the inflation front. Nonfarm business productivity dropped 7.5% [on a seasonally adjusted annual rate] during Q1,” wrote Ed Yardeni, president and chief investment strategist at Yardeni Research, in a Thursday note.
How bad was that? Try the worst since 1947. Yardeni, however, noted that the data is quite volatile and, that on a year-over-year measure, the drop was less ugly at just 0.6%. Economists noted that the data also reflected continued supply shortages and other drags on the economy.
Still, it was a setback, Yardeni said, “for our Roaring 2020s scenario of a technology-led productivity growth boom offsetting the chronic shortage of labor.”
A modest quarterly rise in compensation costs was an overlooked bright spot. It was more than offset by the large quarterly productivity drop, Yardeni said, which made for an 11.6% annualized quarterly jump in nonfarm business unit labor costs, or ULC, which rose 7.2% year over year.
“The ULC inflation rate tends to determine the underlying trend in consumer price inflation. So far, neither of them show any sign of peaking,” Yardeni said.
That was no help to stock-market bulls, with major indexes on track for their biggest daily drops since the pandemic-induced volatility of 2020 as they more than wiped out a sharp relief rally scored in the wake of Wednesday’s rate hike by the Federal Reserve.
The Dow Jones Industrial Average
was down nearly 1,200 points, or 3.5%, after a rise of more than 900 points in the previous session. The Nasdaq Composite
plunged more than 5%, while the S&P 500
was down 3.7%.
Yardeni, however, remained upbeat about the outlook for productivity, noting that the 20-quarter growth rate was at an annual 1.5% in the first quarter, well above its 0.5% trough at the end of 2015. He expects it to head to the 3.5% to 4.5% range by the second half of the decade.