JPMorgan notes US productivity growth normalizes

On Thursday, JPMorgan provided insights into the current state of U.S. productivity, noting a return to pre-pandemic levels. Against a backdrop of strong market performance, with the S&P 500 (tracked by SPY) showing a robust 9.9% return over the past year according to InvestingPro data, the analysis observed that nonfarm business productivity experienced a 0.8% quarter-over-quarter seasonally adjusted annual rate (saar) decline in the first quarter. Despite this downturn, compensation per hour increased by 4.8%, leading to a 5.7% surge in unit labor costs.

The contraction in productivity, marking the first in almost three years, was highlighted as a primary factor behind the weak Gross Domestic Product (GDP) performance, which decreased by 0.3% in the first quarter. This economic uncertainty is reflected in recent market movements, with SPY showing a -4% year-to-date return despite maintaining strong overall financial health metrics, as indicated by InvestingPro’s comprehensive analysis. This occurred even though hours worked in nonfarm businesses grew by 0.6%, maintaining a pace consistent with the previous two quarters.

The report suggests that measurement issues linked to an import surge in the first quarter might have led to an understatement in GDP and productivity figures. Nonetheless, negative productivity in a single quarter is not uncommon. JPMorgan analysts recommend focusing on the four-quarter change for a clearer picture. Over the past year, productivity increased by 1.4%, a significant slowdown from the 3.3% rise in the preceding four-quarter span, indicating a normalization of productivity growth.

In terms of unit labor costs, there was a modest year-over-year increase of 1.3%, aligning closely with the rates seen just before the pandemic. Further analysis compared the recent 1.4% annual productivity rise to the 1.5% average pace from 2008 to 2019 and the slower 1.2% pace from 2010 to 2019. The report referenced Gordon and Sayed (2022), acknowledging that some of the slow productivity growth following the Great Recession could be attributed to the reversal of excessive layoffs during that period. Therefore, it may be more appropriate to compare current productivity growth to the extended period that includes both the recession and the subsequent recovery.

In other recent news, Deutsche Bank (ETR:DBKGn) has revised its year-end target for the S&P 500 Index, lowering it from 7,000 to 6,150 due to the impact of newly announced tariffs. The bank’s analysts, including Binky Chadha, have also reduced their earnings per share estimate for 2025 from $282 to $240, indicating a 5% decline from the previous year. Similarly, Citi analysts have adjusted their year-end price target for the S&P 500 to $5,600, down from $6,500, following a decrease in their 2025 EPS estimate from $270 to $255. These revisions reflect concerns over global trade disruptions caused by tariff policies. In another development, Evercore ISI highlighted the resilience of the U.S. economy despite a slight contraction in GDP, with strong payroll employment figures and solid earnings from S&P 500 companies. The labor market and consumer spending remain stable, though warning signs such as increased unemployment claims are emerging. Meanwhile, Marko Kolanovic has expressed concerns about a potential market downturn, citing high price-to-earnings multiples and potential recession risks. Finally, the passing of Pope Francis and the selection of a new Pope could impact global markets, as the Vatican’s influence extends beyond religious spheres into financial decision-making.

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