The ECONOMIST on U.S. productivity growth.
[Interestingly, the ECONOMIST doesn't mention the role of the over 4% average annual increase in the nominal major-currencies trade-weighted value of the dollar -- or over 5% in real terms -- during the period 1996 to 2001. This is a key factor that would hurt profits despite rising productivity.] May 11, 2002 FINANCE ECONOMICS To these, the spoils NOT only has America's productivity wonder survived its first recession; it has positively thrived. Output per man-hour in the non-farm business sector rose at an annual rate of 8.6% in the first quarter of this year, its fastest growth in 19 years. Quarterly figures are volatile, yet the year-on-year growth in productivity was also impressive, at 4.2%. This bodes well for America's future economic growth--but not necessarily for company profits, or for share prices. Commentators cheered the latest evidence of rapid productivity gains, hoping that it might promise fatter profits ahead. That America's productivity continued to rise last year, in contrast to previous recessions, seems to confirm that an increase has taken place in trend productivity growth. Still, the latest numbers overstate the underlying trend. First, the growth in output, and hence productivity, was inflated in the first quarter by a big swing in inventories. Productivity often surges in the first year of a recovery after recession, as firms produce more without needing to hire extra workers. Productivity rose by 4-5% in the first year following both the 1981-82 and the 1990-91 recessions. Firms have actually continued to cut jobs this year, lifting the unemployment rate in April to an eight-year high of 6%. Today's best guess is that trend productivity growth is around 2-2.5%. That is less than the 3-4% claimed at the height of the new-economy bubble; but still well above the 1.4% average over the two decades to 1995. A second, more fundamental quibble is that, although profits will certainly rebound this year, as firms continue to trim their costs and revenues rise, in the longer term faster productivity growth does not automatically mean faster profits growth. A new study by Stephen King, chief economist at the HSBC bank, concludes that workers and consumers have received the lion's share of the productivity gains of therevolution in information technology (IT). Companies have received relatively little reward for their risk-taking. In the late 1990s it was widely assumed that faster productivity growth would mean higher profits (so justifying higher share prices). Over the previous half-century a strong positive relationship had indeed held between productivity and profits. In the 1990s that relationship broke down. Despite a surge in productivity, national-accounts profits (as opposed to profits reported by companies, a less accurate measure) fell between 1997 and 2000, even before the economy dipped into recession (see chart). At the end of 2000 the profits of America's non-financial firms were no higher in real terms than in 1994, implying a big fall in their share of GDP. Mr King argues that workers (who are, naturally, also consumers) were virtually the sole beneficiaries of the new economy, in the shape of faster real wage growth. This was partly thanks to a fall in the prices of IT goods that they bought. More important, the same IT that spurred productivity also increased competition more widely across industries, from airlines and banking to insurance and cars, squeezing prices and profits. Information technologyreduces barriers to entry, and makes it easier for consumers to compare prices. What is more, globalisation, itself spurred by information technology, has further trimmed the pricing power of firms. HSBC finds that, in most economies, the correlation between domestic inflation and domestic unit-labour costs has declined over the past 40 years; the correlation between domestic inflation and average OECD inflation has risen. In most countries in the 1990s domestic inflation was more closely correlated with OECD inflation than it was with domestic costs. The dismal performance of profits should not surprise. As the IMF's World Economic Outlook last October pointed out, productivity gains from previous technological revolutions, from railways and textiles to electricity and the car, have gone largely to consumers. Each time, a decline in the prices of goods and services has given a big boost to real incomes. Consumers gained from cheaper travel or clothes, but profits disappointed. The difference this time is that new technology has increased competition and squeezed profit margins across the whole economy. None of this lessens the overall benefit of faster productivity growth. But it does lead to some interesting conclusions: * The profit expectations built into share prices are unrealistic. Even if productivity growth remains robust, long-term profits growth is likely to be weaker than expected, making shares overvalued. * A lower return on equities means
Re: The ECONOMIST on U.S. productivity growth.
On 2002.05.11 02:08 AM, "Devine, James" [EMAIL PROTECTED] wrote: [Interestingly, the ECONOMIST doesn't mention the role of the over 4% average annual increase in the nominal major-currencies trade-weighted value of the dollar -- or over 5% in real terms -- during the period 1996 to 2001. This is a key factor that would hurt profits despite rising productivity.] May 11, 2002 FINANCE ECONOMICS To these, the spoils NOT only has America's productivity wonder survived its first recession; it has positively thrived. Output per man-hour in the non-farm business sector rose at an annual rate of 8.6% in the first quarter of this year, its fastest growth in 19 years. Quarterly figures are volatile, yet the year-on-year growth in productivity was also impressive, at 4.2%. This bodes well for America's future economic growth--but not necessarily for company profits, or for share prices. Commentators cheered the latest evidence of rapid productivity gains, hoping that it might promise fatter profits ahead. That America's productivity continued to rise last year, in contrast to previous recessions, seems to confirm that an increase has taken place in trend productivity growth. Still, the latest numbers overstate the underlying trend. First, the growth in output, and hence productivity, was inflated in the first quarter by a big swing in inventories. Productivity often surges in the first year of a recovery after recession, as firms produce more without needing to hire extra workers. Productivity rose by 4-5% in the first year following both the 1981-82 and the 1990-91 recessions. Firms have actually continued to cut jobs this year, lifting the unemployment rate in April to an eight-year high of 6%. Today's best guess is that trend productivity growth is around 2-2.5%. That is less than the 3-4% claimed at the height of the new-economy bubble; but still well above the 1.4% average over the two decades to 1995. A second, more fundamental quibble is that, although profits will certainly rebound this year, as firms continue to trim their costs and revenues rise, in the longer term faster productivity growth does not automatically mean faster profits growth. A new study by Stephen King, chief economist at the HSBC bank, concludes that workers and consumers have received the lion's share of the productivity gains of therevolution in information technology (IT). Companies have received relatively little reward for their risk-taking. In the late 1990s it was widely assumed that faster productivity growth would mean higher profits (so justifying higher share prices). Over the previous half-century a strong positive relationship had indeed held between productivity and profits. In the 1990s that relationship broke down. Despite a surge in productivity, national-accounts profits (as opposed to profits reported by companies, a less accurate measure) fell between 1997 and 2000, even before the economy dipped into recession (see chart). At the end of 2000 the profits of America's non-financial firms were no higher in real terms than in 1994, implying a big fall in their share of GDP. Mr King argues that workers (who are, naturally, also consumers) were virtually the sole beneficiaries of the new economy, in the shape of faster real wage growth. This was partly thanks to a fall in the prices of IT goods that they bought. More important, the same IT that spurred productivity also increased competition more widely across industries, from airlines and banking to insurance and cars, squeezing prices and profits. Information technologyreduces barriers to entry, and makes it easier for consumers to compare prices. What is more, globalisation, itself spurred by information technology, has further trimmed the pricing power of firms. HSBC finds that, in most economies, the correlation between domestic inflation and domestic unit-labour costs has declined over the past 40 years; the correlation between domestic inflation and average OECD inflation has risen. In most countries in the 1990s domestic inflation was more closely correlated with OECD inflation than it was with domestic costs. The dismal performance of profits should not surprise. As the IMF's World Economic Outlook last October pointed out, productivity gains from previous technological revolutions, from railways and textiles to electricity and the car, have gone largely to consumers. Each time, a decline in the prices of goods and services has given a big boost to real incomes. Consumers gained from cheaper travel or clothes, but profits disappointed. The difference this time is that new technology has increased competition and squeezed profit margins across the whole economy. None of this lessens the overall benefit of faster productivity growth. But it does lead to some interesting conclusions: * The profit expectations built into share prices are unrealistic. Even if productivity
Re: U.S. productivity
How exactly are these productivity figures arrived at? jd --- There was a question the other day about productivity performance in the U.S. Here are some numbers, current through last week's downward revision of the 1997Q3 stats. Though there was a bounce in the 1997Q2 Q3 figures, performance over the whole cycle is underwhelming.
Re: U.S. productivity
Tom Walker wrote: Isn't this one for the entire period, rather than an annual average? 93Q1-97Q3 4.3% 15.3% (Clinton years) Ooops. Yeah. In fact the whole bottom half of that table was mislabeled. Here's the way it should read. A thousand apologies. Doug U.S. LABOR PRODUCTIVITY --- all nonfarm business and manufacturing, through 1997Q3 AVERAGE ANNUAL GROWTH RATE BY PERIOD nonfarm manuf'g 1947-52 1952-57 2.7% 1957-62 2.2% 1962-67 3.2% 2.7% 1967-72 2.2% 3.9% 1972-77 2.1% 2.9% 1977-82 0.0% 1.1% 1982-87 1.9% 3.9% 1987-92 1.1% 2.1% 1992-97 0.8% 3.0% 1950-60 2.5% 2.2% 1960-70 2.5% 2.6% 1970-80 1.9% 2.9% 1980-90 1.1% 2.8% 1990-97 1.1% 3.1% CUMULATIVE GROWTH 93Q1-97Q3 4.3% 15.3% (Clinton years) 1991-97Q3 1.1% 3.1% (1990s expansion) 26Qs after:* 49Q4 19.2% 15.6% 54Q2 13.6% 12.3% 58Q2 23.3% 21.6% 61Q1 26.4% 23.8% 70Q4 17.5% 24.2% 75Q19.3% 13.9% 82Q49.9% 21.3% 91Q18.6% 23.8% *length of current expansion; starting points are previous business cycle troughs
Re: U.S. productivity
Isn't this one for the entire period, rather than an annual average? 93Q1-97Q3 4.3% 15.3% (Clinton years) Regards, Tom Walker ^^^ knoW Ware Communications Vancouver, B.C., CANADA [EMAIL PROTECTED] (604) 688-8296 ^^^ The TimeWork Web: http://www.vcn.bc.ca/timework/
U.S. productivity
There was a question the other day about productivity performance in the U.S. Here are some numbers, current through last week's downward revision of the 1997Q3 stats. Though there was a bounce in the 1997Q2 Q3 figures, performance over the whole cycle is underwhelming. Manufacturing is doing a lot better than services, though this may be the result of contracting out a lot of service activities that no longer appear in the manfuacturing sector. A brief commercial announcement: it takes a lot of time effort to keep these numbers current. If you don't already subscribe to LBO, hey why not do it now, and help keep this little enterprise going. U.S. LABOR PRODUCTIVITY - AVERAGE ANNUAL GROWTH RATE BY PERIOD all nonfarm business and manufacturing, through 1997Q3 nonfarm manuf'g 1947-52 1952-57 2.7% 1957-62 2.2% 1962-67 3.2% 2.7% 1967-72 2.2% 3.9% 1972-77 2.1% 2.9% 1977-82 0.0% 1.1% 1982-87 1.9% 3.9% 1987-92 1.1% 2.1% 1992-97 0.8% 3.0% 1950-60 2.5% 2.2% 1960-70 2.5% 2.6% 1970-80 1.9% 2.9% 1980-90 1.1% 2.8% 1990-97 1.1% 3.1% 93Q1-97Q3 4.3% 15.3% (Clinton years) 1991-97Q3 1.1% 3.1% (1990s expansion) 26Qs after:* 49Q4 19.2% 15.6% 54Q2 13.6% 12.3% 58Q2 23.3% 21.6% 61Q1 26.4% 23.8% 70Q4 17.5% 24.2% 75Q19.3% 13.9% 82Q49.9% 21.3% 91Q18.6% 23.8% *length of current expansion; starting points are previous business cycle troughs Doug -- Doug Henwood Left Business Observer 250 W 85 St New York NY 10024-3217 USA +1-212-874-4020 voice +1-212-874-3137 fax email: mailto:[EMAIL PROTECTED] web: http://www.panix.com/~dhenwood/LBO_home.html
