Post-Pandemic Economy: Industrial Wins, Healthcare Woes

Unraveling the Impact of Productivity Trends on Sector-Specific Investing

Interpreting the U.S. nonfarm productivity report as more than an economic health gauge, but also a guidepost for sector-specific investment, could prove invaluable. Recent trends demonstrate the significant influence of productivity surprises on sector performance, especially visible in the stark contrast between industrial and healthcare sectors. As industrial stocks thrive with productivity exceeding forecasts, healthcare struggles as rising costs and structural inefficiencies sap its vitality. Investors stand to gain significantly from understanding this evolving landscape of capital allocation.

Industrials: Harnessing Productivity Booms

With an average productivity growth of 2.7% in 2024, the nonfarm business sector has seen manufacturing emerge as a leader. In the first quarter of 2025 alone, automation, supply chain reconfiguration, and capital investment spurred a 4.4% leap in manufacturing labor productivity. Industries such as electric vehicles (EVs) and aerospace have maximized output and minimized labor costs with the help of AI and robotics. This is exemplified by production lines such as Tesla’s Gigafactories and Boeing’s 787 Dreamliner, which demonstrate how substantial efficiency gains can be achieved through capital deepening.

Historically, industrial sectors have outperformed during periods of high productivity. This pattern points to a strategy of overweighing industrial portfolios during periods of productivity growth above 2.1%. From 2010 to 2025, such a strategy outdid the S&P 500 by an annual average of 3.2%. Companies like 3M and Honeywell took this trend to new heights in 2024 with increased automation and nearshoring, while policymakers fueled domestic manufacturing through tax credits and spending on infrastructure.

The Productivity Quandary in Healthcare

The healthcare sector, however, presents a different story. Despite a 20.8% wage increase for healthcare workers from 2020 to 2024, productivity growth remained stagnant at an annual average of 0.2% from 2007 to 2021. The pandemic only worsened the situation with skilled nursing care employment falling 8.3% below pre-pandemic levels and hospitals grappling with escalating unit labor costs. Attempts to improve efficiency through telehealth adoption were held back by labor-intensive care models and regulatory overhead.

The sector’s difficulties are emphasized by its negative relationship with multifactor productivity (MFP). While healthcare spending generally aligns positively with GDP and labor productivity, this often results in decreased input efficiency. Case in point, a 1% increase in healthcare expenditure correlates with a 0.15% drop in MFP, underlining the sector’s dependence on labor over capital. This shift has prompted investors seeking margin resilience to view healthcare insurers and providers less favorably.

Strategic Realignment for the Productivity Cycle

This disparity between industrials and healthcare is not merely cyclical, but structural. While industrial sectors enjoy compounding returns from capital investment, healthcare is under pressure from labor cost inflation and regulatory constraints. This suggests a strategic shift for investors:

1. Overweight Industrial Sectors: Prioritize firms with a strong commitment to automation, AI, and capital deepening. Industries such as EVs, aerospace, and advanced manufacturing are poised to take advantage of productivity-driven growth.
2. Underweight Healthcare Services: Limit exposure to labor-dependent healthcare insurers and providers, which face potential long-term margin erosion. Instead, consider investing in healthcare technology or pharmaceuticals, where productivity gains are more apparent.
3. Keep an Eye on Policy Trends: Incentives like the CHIPS Act and the Inflation Reduction Act are likely to push industrial performance higher. On the other hand, healthcare reforms aimed at cost reduction (e.g., price controls, telehealth expansion) could alleviate some of the sector’s structural hurdles.

Investment Strategy in a Nutshell

The U.S. nonfarm productivity report is more than just an economic indicator. It serves as a guide for sector rotation strategy. As industrials leverage automation and capital efficiency to outperform, the healthcare sector’s labor-intensive model can potentially drag down returns. The key takeaway for investors is to align their portfolios with productivity driving forces and prepare for the next economic cycle. Those who view productivity not merely as a statistic, but as a key to future capital allocation, are the ones who will come out ahead.