While this may seem to be an esoteric academic debate, slowing productivity growth matters. By lowering potential economic growth, it can lead to bottlenecks and wage pressures, which kick in at lower levels of growth, risking both inflation and higher rates.
Lower productivity can also negatively impact equities. Slower economic growth means slower earnings growth. In addition, lower productivity also implies to lower valuations. Historically, for every 1 percentage point increase in productivity, the multiple on the S&P 500 was 0.32 points higher, as Bloomberg data show.
As of today, the truth is we simply don’t know the extent of the problem. But as I think about the outlook for markets over the next several years, I’m confident that how the productivity puzzle gets resolved will have a greater impact on asset class performance than the next few jobs reports.