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Unsurprisingly productivity growth was extremely weak in the first half of the year as economic growth was inordinately sluggish amid a healthy pace of job creation.  Productivity is the linkage between hours worked and economic output, and due to its continued weakness, the economy generated jobs at a pace associated with at least trend growth in the first half, while in reality output barely rose.

I guess a positive to the negative data is if one is leftist leaning the economy is continuing to absorb labor slack even amid output gains that are well below trend.  However this environment is greatly inefficient and potentially inflationary…making less with more.

Productivity in 2Q was weaker than expected, declining by 0.5%, compared with the consensus forecast of 0.4% gain.  First quarter productivity fell by 0.6%. Fourth quarter productivity fell by 2.5% thus pushing the year on year trend into negative territory at 0.4%, which is a rare occurrence.

According to the BLS, from 1982 until the onset of the Great Recession, the year on year trend was below zero for only two quarters.  This has now occurred three times since the last recession ended thus stating that today’s productivity data  is a gargantuan deviation.

The weakness is directly result of output growth running slower than gains in hours worked.  I sarcastically ask is this the result of all staring at their phones?

A major difference in this recovery as to others is the lack of reinvestment into infrastructure.  The debate as to why this is occurring has not been resolved but I think it is a combination of corporate chieftains fearing their stock price of being punished unfairly with any growth initiatives that may take several years to bear fruit, to punishing regulatory and bureaucratic intrusions, to lack of confidence and finally the lack of access to capital.

Speaking of equity capital, according to Blackrock there are 4,333 listed US companies, down from 8,025 in 1996.  2016 has been the fewest number of IPOs since 2009.  On the other hand according to the Financial Times globally there are now over 6,100 ETFs with the number of ETFs involved in US securities totaling 4,396.  There was zero in 1996.

ETFs do not raise capital for companies but rather purchase futures reflecting the capitalization of the index that the ETF is trying to mimic.  ETFs may be low cost investment vehicles but do not directly contribute to the corporate treasuries the ETFs are attempting to mimic.  These funds are not utilized to directly boost economic production.

Can I argue this is a major reason why Goldman and several other bulge bracket firms are suggesting the markets can decline 15% in quick order given the proliferation of ETFs which are primarily market capitalization based models, where everyone already owns the same few securities that dominate the value of the futures?  Absolutely.

Enough of the ramblings, yesterday equities were quiet as Treasuries rallied following a strong 3 year note auction and the belief interest rates will remain low forever.

Last night the foreign markets were down.  London was down 0.23%, Paris down 0.28% and Frankfurt down 0.48%.  China was down 0.23%, Hang Sang up 0.12%and Japan down 0.18%.

The Dow should open flat.  The 10-year is up 1/32 to yield 1.55%.

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Ken Engelke

Chief Economic Strategist Managing Director

The views expressed herein are those of Kent Engelke and do not necessarily reflect those of Capitol Securities Management. Any opinions expressed are statements of judgment on this date and are subject to certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated or projected. Any future dividends, interest, yields and event dates listed may be subject to change. An investor cannot invest in an index, and its returns are not indicative of the performance of any specific investment. Past performance is not indicative of future results. This material is being provided for informational purposes only. Any information should not be deemed a recommendation to buy, hold or sell any security. Certain information has been obtained from third-party sources we consider reliable, but we do not guarantee that such information is accurate or complete. This report is not a complete description of the securities, markets, or developments referred to in this material and does not include all available data necessary for making an investment decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. If you would like to unsubscribe from this e-mail distribution, please reply to this e-mail and indicate that you wish to unsubscribe in your response.