"Jobs and output are advancing at roughly the same rate. Productivity growth is nil," says Charles Dumas at Lombard Street Research. This continues a trend for productivity to slow. During the last five years, output per worker-hour in the non-farm business sector has grown by 1.5 per cent a year, well below the average rate since 1947 (when records began) of 2.2 per cent a year. And in the first quarter, annualised growth was just 0.5 per cent.
This matters for the short term, because it implies that the closely-watched employment report is giving too rosy a view of the US economy; companies might be creating jobs not because the economy is growing well but because stagnant productivity means that even small rises in output require extra staff.
However, it matters for a more important reason. For years, productivity growth has been closely associated with US equity valuations. Rising productivity growth in the 1950s and 60s saw a rise in the price-earnings ratio on the S&P 500. The productivity slump of the 1970s was accompanied by a fall in multiples. The 1980s recovery in productivity helped PE ratios recover, and they got a further boost in the late 1990s when productivity accelerated. Since then, though, productivity growth has slowed, which has dragged PE ratios down: the only exception to this came in 2008-09 when PE ratios soared because earnings slumped in the recession.
There's a simple reason for this link. Productivity growth determines the rate at which the economy can grow in the longer term. Slower productivity growth therefore implies slower trend GDP growth, which in turn implies slower growth in corporate earnings. And if investors expect slower earnings growth, PE ratios will be low.
You might object that this shouldn't be the case now, because the economy could grow nicely for a few years even without a rise in productivity. This is because Americans are unusually under-employed. Only 58.7 per cent of working-age people are in a job now compared with over 63 per cent before the recession. If the employment-population ratio can return to its normal rate, GDP could grow nicely simply as people move into work.
However, this isn't much comfort for the stock market. For one thing, such growth would benefit labour incomes more than corporate earnings. And for another, it might not happen. Companies are traditionally more reluctant to expand output by hiring than they are to do so by increasing productivity. And it's possible that if they do try to do so, the Fed would raise interest rates; it is targeting the unemployment rate, remember, not the employment-population ratio.
It's reasonable to suppose, then, that the link between equity valuations and productivity growth will continue. This means that if productivity growth remains low, so too will valuations, which in turn implies low returns on US equities. Which raises the question: why has productivity growth slowed? There are (at least) three possible culprits.
One lies in companies' reluctance to invest. In the US, as in the UK, companies have in recent years been running a financial surplus - that is, investing less than they have been saving through retained profits. In the last 12 months this surplus was equivalent to 1 per cent of GDP, compared with an average deficit of 0.5 per cent of GDP since 1980.
This lack of investment is both a cause and symptom of low productivity growth. It's a cause, because it means staff are working with older and less reliable equipment and so are less productive; they spend their time cussing broken servers rather than working. And it's a symptom because low investment is a sign of a lack of monetisable investment opportunities, which in turn reflect a slowdown in the rate of technical progress - and slower technical progress means slower productivity growth.
Second, the US might have suffered from what Luca Fornaro and Gianluca Benigno of the LSE call a financial resource curse. In the 2000s, low interest rates diverted resources away from manufacturing towards construction and real estate-related activities - a process exacerbated by the offshoring of much manufacturing. Because manufacturing is more likely to enjoy good productivity growth over time than construction or services, this process reduced the economy's ability to raise productivity over time.
A third cause of the productivity slowdown is a slower rate of creative destruction. It's tempting to think that productivity grows because companies increase their efficiency over time. But this is only part of the story, and perhaps a small one. Productivity also grows because inefficient companies or plants shut down and are replaced by more efficient businesses - or at least by ones that are potentially more efficient. Anything that slows down the rate of companies' entry and exit will therefore reduce productivity growth. And two things at least have done so.
First, a combination of low interest rates and banks' forbearance has stopped some inefficient companies from going bust. Last year, 40,075 US companies filed for bankruptcy. Although that's twice as many as in 2006, it is less than in most years between 1980 and 2000. Second, the fear that banks might withdraw credit lines in future deters the formation of new companies or the expansion of efficient ones. Yes credit constraints on companies have eased since 2009. But it is only if companies trust banks to keep credit open that they will expand. And this trust has declined.
One sign that the exit and entry channels are silted up comes from official figures on job creation and destruction. These show that both rates are lower now than they were before the crisis - consistent with less creative destruction.
Herein, though, lies a problem. It's impossible to tell how long these forces will continue to hold productivity growth back, or how powerful they will be. Forecasting productivity growth is pretty much impossible (or at least, forecasting it accurately is).
What we do know, though, is that until there is a turnaround in productivity growth, there's little chance of a sustained rise in US equity valuations. And this probably means there will be only modest returns on equities and - by extension - most developed markets too.
