What will it take for companies to stand out to investors over the next decade? By increasing productivity, successful companies set themselves apart in three ways. They will distinguish themselves as the best places to work for employees, the best option in a sea of competitors for consumers, and the investment option with the most upside for investors.
How good is a company at taking a pile of raw materials, some machinery, and teams of employees and churning out valuable goods and services? Productivity measures it. Say a company spends $1 million to create outputs worth $2 million. If they can deploy that same spending level and produce goods or services worth $2.1 million through better workers or new technology, productivity will increase. Productivity growth is the key driver of higher living standards. Think about road-building. Today one driver and her earthmoving equipment can do the same job it took multiple laborers to do by hand one hundred years ago.
Companies track productivity to help make investment decisions to upgrade a production line or make hiring decisions to achieve growth objectives. We also track productivity across the economy. According to the Bureau of Labor Statistics (BLS), productivity increases in the U.S. have enabled businesses to produce nine times more goods and services since 1947, with a minor increase in hours worked. Productivity is measured in multiple ways depending upon the company and its goals, but the outcomes are always about how efficiently managers use their resources.
After years of stagnation, productivity growth in our economy is growing again. At the end of the second quarter, revenues and earnings for the S&P were higher than before the pandemic, despite employment down 5 million workers from the peak. The BLS reports productivity growth of 5.4% and 2.3% for the first two quarters of 2021. And those numbers have been moving up over the last year. While productivity growth is never linear, these are much better than the average 1.3% growth for the past 15 years. As a result, expectations are growing for the next decade to reflect an acceleration in productivity growth that will help drive living standards higher.
One ingredient to growing productivity is new technology, but technology by itself won’t create significant benefits. Companies need to apply the technology to new business processes. The advent of the personal computer didn’t generate productivity gains alone. When businesses learned how to conduct business differently using personal computers and digital connectivity, processes became more efficient, and productivity surged.
The last decade has seen a similar burst of technological advancement. The development of artificial intelligence, the dramatic cost declines for data storage, and improvements in computing power have allowed firms to rethink yet again how they do business. Advances in drug developments such as mRNA allow for faster creation and approval for new and novel therapies.
These developments and others are coming as companies face incredible hiring difficulties to meet the growing demand for their goods and services. Whether due to changing demographics, government policy, or a shifting outlook towards work in general, employment challenges will be with us for some time. As well as meeting rising wage requirements and asking employees to work more, companies will invest in new machinery and new technology to meet the demand. Doing so will open more opportunities for productivity growth over the next decade, reaping benefits for investors along for the ride.
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