Will AI Be the Antidote to Low Productivity?

Jeffrey Roach:

Hi, I'm Jeffrey Roach, chief economist for LPL Financial, and in this latest edition of the Street View, I'll give you some areas of interest in this current macro landscape. And the first one is this. One reason markets are rightfully preoccupied with artificial intelligence is from the downshift in productivity in the U.S., which we saw in the years just before 2020. So I show in this chart, the average annual productivity growth in the previous century was much higher than the 2000s. So basically the question was, will the tremendous productivity growth of the late 1990s persist? The change in computing power and internet related innovations sped up the growth of the economy and created some head-scratching conundrums, as Alan Greenspan would say, the former chairman of the Federal Reserve. So it's helpful for investors to understand that productivity growth could become the antidote for demographic and headwinds from inflation.

Jeffrey Roach:

So we should celebrate firms focused on disruptive technologies, able to enhance our work experience. But without an improvement in technology, the recent productivity trend will not likely revert back to the stronger growth of the previous century. The AI boom is a positive for equity markets for several reasons. First, it has sparked a wave of capital investment for companies trying to take advantage of these exciting new capabilities. And second, that investment will likely boost productivity for corporate America, lifting profit margins, which means just more revenue without adding more people. And third, productivity gains allow the economy to grow with less wage inflation, keeping interest rates down and supporting stock valuations. And this is the perfect storm that drove the massive stock market rally in the late 1990s. Let me give you a second chart. When firms begin to step up their investment into research and development, that contribution to overall economic growth can last for quite a few years. So this chart illustrated the outsized contribution to growth from business capital investment from R&D. So one key takeaway here is as consumer spending slows, one bright spot in the economy right now is business fixed investment. And we know from previous cycles, markets rewarded firms that invested in research and development. It's often the case when firms increase capital investment. That commitment lasts for several years and markets often reward that commitment. For more insights on capital markets, follow LPL Research on social media and take care.