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How Could Capex and Productivity Impact the Economy in 2018?

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LIZ ANN SONDERS: Hi, everybody, Liz Ann Sonders here with the November 8th Market Snapshot, flying solo. I wanted to touch on two topics that I think are very relevant, not only right now, but looking ahead into 2018. And they’re topics about which I’ve written recently and plan to have incorporated into the 2018 outlook. And it’s business capital spending and productivity, and there’s a relationship between the two.

We’re already seeing a pickup in both of those after a fairly lengthy moribund period for both business Capex and productivity. Now, one of the key underpinnings to a Capex cycle—which I think we are in the beginning of—is of course corporate profitability, and at the end of the video I’m going to get to some numbers there. But both bottom-line growth and top-line growth for corporate America support a continued pickup in business capital spending.

The profitability is there, the need to spend--given the age of the capital stock--is there, and we think the animal spirits that we’ve seen build over the past year or so is an important underpinning for that capital spending cycle. So we do think that that’s going to be a bright spot in the economy looking into 2018.

And then tied to that, and one of the reasons why businesses are deciding to step up their spending, is to try to boost productivity, which has also been quite weak. In fact, it’s been, I think, the second-weakest expansion in terms of productivity. Now, not only do I expect to see a continued lift in productivity—because of this capital spending cycle—another important angle here on productivity is that we think it’s probably being a bit mis-measured in today’s economy.

So non-farm labor productivity, which is the formal name for productivity when we talk about that generically—the same calculation methodology has been used since decades ago—when we were much more of a manufacturing-oriented economy. And in today’s more digital-oriented economy, when you think about how we lead our daily lives—how we transact business, how we get information, the productivity enhancements that we feel on a day-to-day basis—I think one can fairly easily argue that productivity is understated. And if that’s the case, then it means that overall economic growth has probably been a bit understated.

And then, as I touched on in the beginning, corporate profitability is important, and because we’re largely through a third-quarter earnings season I just wanted to give you an update there. So there’s usually, rightly so, a lot of focus on earnings per share, but we have to remember that earnings per share can be manipulated to some degree.

That’s why there’s an additional--maybe an even more important--focus on top-line growth or revenue growth. Which can’t be manipulated. And the good news, as we sit at the end of third-quarter reporting season, is that we’re looking at an expectation in 2017 for double-digit earnings growth, and in 2018, and kind of mid-single-digit kind of revenue growth. Which is stronger than overall economic growth, and a very important underpinning for this capital spending cycle and, in turn, productivity cycle that we’ll expect to see in 2018.

So if you want to read more, you can find us on the Insights & Ideas segment of Schwab.com, and of course you can always follow me on Twitter, @LizAnnSonders. Thank you, as always, for tuning in.

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