Productivity and the Stock Market
Posted in Economic Indicators
December 1, 2009
Does the quarter-to-quarter change in U.S. workforce productivity indicate anything about future U.S. stock market behavior? Specifically, does a rise (decline) in productivity portend strong (weak) earnings and therefore an advance (decline) for stocks? Using annualized quarterly changes in non-farm labor productivity as originally reported by the Bureau of Labor Statistics (BLS) and S&P 500 Index data spanning January 1950 through September 2009 (239 quarters), we find that:
The following scatter plot relates the next-quarter change in the S&P 500 index to the quarterly annualized change in productivity over the entire sample period. The Pearson correlation for the relationship is 0.07 and the R-squared statistic is 0.00, indicating that variations in productivity explain none of the variations in next-quarter stock market return. Note that BLS announces productivity changes about a month after the end of the quarter reported.
For the first half of the sample (through 1980), the correlation is 0.11. For the second half of the sample (since 1980), the correlation is 0.03.
In case there are material non-linearities in the relationship, we examine quintiles of productivity change.
The next chart summarizes the average next-quarter returns for the S&P 500 Index by quintile of quarterly productivity change over the entire sample period. Although there is no systematic relationship across quintiles between future stock market returns and productivity change, there is some indication that weak productivity readings are worse than normal and strong readings.
Might there be a delay of more than a quarter in the relationship between stock market return and productivity change?
The final chart summarizes relationships between S&P 500 index quarterly return and quarterly productivity change for various lead-lag scenarios, ranging from stocks lead productivity by six quarters (-6) to productivity leads stocks by six quarters (6), for the entire sample. The strongest indication is that stock market return leads productivity change by one quarter with a positive relationship (correlation 0.24). In other words, stocks have already risen (fallen) before productivity rises (falls).
In summary, evidence from simple tests indicates that quarterly change in productivity is of no use to investors as a standalone indicator for predicting stock market behavior.
