Some investors question what has powered the stock market higher since November’s elections.
After all, GDP growth is solid but not great. The labor market is cooling. And corporate profits only grew 6.4% in the third quarter of 2024.
However, the United States has a secret sauce that Canada, Europe, and Asia lack: a productivity boom.
Americans keep finding ways to get more done at work. And “doing more with less” is the very definition of productivity gains.
So far this year, the quarterly productivity of U.S. workers has grown by at least 2% compared with a year earlier.
The third quarter was the fifth-straight quarter of such growth.
And over the past five years, quarterly productivity growth has averaged 2.1%, a sharp improvement from the 10 years prior.
The numbers are adjusted for inflation, which means productivity gains don’t merely reflect higher prices charged for goods and services.
In fact, many businesses are increasing their revenue without passing on higher costs to customers.
And – thanks to the policies that are likely to be implemented by the incoming Donald Trump administration – we are well set up for a low-inflation economic boom in 2025.
Here’s why…
Productivity growth is crucial for economic prosperity and improving living standards.
And the recent trend has positive implications for wages, prices, and overall economic growth.
Here’s why productivity gains are essential:
- Higher wages. As workers produce more output per hour, companies can afford to pay higher wages without increasing unit labor costs.
- Lower prices. Increased efficiency allows businesses to reduce prices without sacrificing profits. This benefits consumers and improves competitiveness.
- Stronger economic growth. Over the long run, increasing productivity is the main driver of higher living standards.
- Meeting challenges. Productivity growth helps businesses address issues like workforce shortages, inflation, and higher interest rates.
In 2023, U.S. labor productivity grew by 2.7%, outpacing the 1.5% annual increase since 2004.
Productivity growth averaged just 1.5% in Europe and 1.8% in Asia.
Was our outperformance due to the policies of the Biden administration? (Spoiler alert: No.)
The two primary causes are technological advancements and remote work.
Corporate investments in automation, equipment, and research and development have boosted efficiency.
And the post-pandemic shift to remote and hybrid work has also contributed.
“The Great Reshuffling” matched workers with new opportunities, giving them a chance to contribute more and earn more.
(Turns out that workers are even more productive at home. Meanwhile, corporations are spending much less on office space.)
Companies have also invested in training employees to use new technologies effectively.
None of these are the result of any actions taken by the Biden administration.
Yet the proposed policies of the Trump administration should give productivity a further boost.
Trump has said he would like to cut the corporate tax rate from 21% to 15%.
That will attract more international businesses to the U.S. It will also give American companies more money to spend on recruitment, wages, new technology, and research and development.
Productivity growth will also get a boost from Trump’s deregulatory policies.
Too many American businesses are hamstrung by overregulation, needless red tape created by unelected bureaucrats.
In his first term, Trump was the only modern president to achieve net regulatory reduction.
And with Republicans in control of the House and Senate, he is poised to greatly reduce the size and scope of the administrative state.
Trump has promised to eliminate 10 regulations for every new one introduced, reducing compliance costs for businesses by billions of dollars annually.
(That will also reduce prices for consumers, who pay an estimated $12 trillion annually because of overregulation.)
Infrastructure development, in particular, is one of the most highly regulated industries.
New projects that once took less than two years to complete now routinely take over 10 years. Trump plans to change that.
His business-friendly approach will save time and taxpayer dollars.
It will also boost profits at many companies by reducing compliance and operating expenses.
Trump tweeted this month, “Any person or company investing one billion dollars or more in the United States of America will receive fully expedited approvals and permits… get ready to rock!”
That won’t hurt growth prospects for 2025 either.
In sum, Trump’s proposed tax and regulatory policies are a positive sign for the economy.
They are likely to result in improved economic growth, higher wages, lower prices, bigger profit margins, and stronger corporate earnings.
That, in turn, should lead to higher share prices in 2025.
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