Yesterday’s Productivity Numbers Add Credence to a Turn in the Economy

Last week in this column we seized on an upturn in Average Weekly Hours to suggest that the economy could be turning. Yesterday’s productivity numbers go hand in hand with the AWH report and underscore that possibility as non-farm productivity surged 6.4%, the highest gain in six years, which, not so coincidentally, was a time when the economy was last coming out of a recession.

This number isn’t foolproof. We saw a big productivity surge in the midst of the last recession, which was a “head fake.” But it tells us that businesses have aggressively positioned themselves for a downturn by slashing payroll faster than output has declined. While the human element of people losing their jobs is tragic this lays the groundwork for brighter times ahead.

Surging productivity bolsters corporate profits. Contrary to popular belief it is a turn in corporate profits that will begin the recovery. True to form we saw those bolstered profits during the recently concluded earnings season in which myriad companies across many industry groups not only beat analyst estimates but raised guidance. It was these reports that were the impetus for the second leg higher in the markets that started in mid-July.

Last month’s Average Weekly Hours hinted that a productivity surge such as this might be coming. As we explained last week corporations do not immediately hire when they begin seeing things pick up. They ask more of those still employed, expanding their work week. That an upturn in productivity last quarter yielded an increase in AWHs last month is yet another promising sign that a rebound is underway.

As always revisions in government numbers can cast a different light on these developments a month or two out. And we do not know how much of the nascent turnaround is based on the ephemeral effects of the government stimulus. But once again the market has found reaffirmation of its economic revival thesis. Those shorting the market should rethink their position.