What’s Great for Technology Isn’t So Great for the Rest

Newsclips — July 26, 2018

Markets By Benjamin Breitholtz

Technology continuing to gobble up productivity and profit margin gains remains a central reason for low U.S. Treasury term premiums. Additionally, the yield curve is more apt to invert sooner than past historical instances given this weight on inflation and the long-er end of the curve.

Summary

Technology continuing to gobble up productivity and profit margin gains remains a central reason for low U.S. Treasury term premiums. Additionally, the yield curve is more apt to invert sooner than past historical instances given this weight on inflation and the longer end of the curve.

Comment

The chart below shows Google search trends by metro for recruitment (x-axis) versus salary (y-axis). Tech-heavy metros like Washington DC and Raleigh are showing exceptionally higher levels of recruitment and salary searches relative to rural like Wausau, WI and Twin Falls, ID.

 

 

Technology and financial services have enjoyed steady wage gains exceeding 3.0% year-over-year in recent years. Conversely, manufacturing and goods-producing sectors have again failed to keep up the pace with most recent gains at a tepid 1.7% year-over-year.

 

 

The next chart shows the share (%) of employees by sector since 1990.

Strong wage gains and earnings across technology and telecom have not been met with a greater number of employees. A major issue plaguing the U.S. remains a heavy concentration of productivity to these sectors. 

 

 

Better efficiency and higher productivity have technology, telecom, and financials producing significantly higher profit margins (trailing 12-month shown below) than all remaining sectors. Technology’s profit margin has been running more than double the median of these remaining sectors since the financial crisis. 

 

 

This quandary of concentrated productivity and profits is a major reason U.S. Treasury term premiums refuse to rise. The chart below shows the spread between profit margins for technology, financials, and telecom versus remaining sectors on the left axis and U.S. 10-year term premium on the right axis.

In theory, productivity gains should be able to seep into other sectors, but the pace of improvement in technology appears overtly difficult to chase. The U.S. yield curve may invert sooner than it otherwise would have given this weight placed on longer-end yields.