The Issue Isn’t Stocks; It’s Growth, Productivity
The stock market is not the issue; growth and productivity are. That’s what investors and everybody interested in the U.S. economy should keep in mind after a hectic week on Wall Street. The wild fluctuations in stock prices were part of an argument millions of investors and government officials were having over the economy.
The question is whether low unemployment, growing numbers of new jobs and average hourly wage gains of 4% would raise business costs, hurt profits and spark rising inflation. Or were the job and wage gains a result of greater productive output by workers and companies, raising living standards without increasing inflation in the U.S. economy?
The answer is that productivity is rising far more than inadequate government statistics show. The economy’s new strength is more often argued about than recognized.
In the uncertainty, investors were alternately negative and positive last week after the Federal Reserve Board raised interest rates as a precaution against inflation.
And the Fed is likely to raise rates another notch in May, just because it believes that the economy, now growing 3.5% to 4% a year after six years of expansion, needs to have the brakes applied.
But does it? “What’s wrong with a little prosperity?” asks economist Edward Yardeni of the Deutsche Morgan Grenfell investment firm, one of those who believes that technology, world markets and new ways of doing business are giving the U.S. economy unrecognized productivity gains.
Rising productivity is the happy state of affairs when higher wages are offset by more output of goods and services. Even the government recognizes impressive productivity gains in traditional manufacturing industries.
In the factories of the Middle West and Southeast, turning out cars and car parts, tractors, machinery and appliances, output per worker or dollar of investment grew 5% in 1996 and 4.4% in 1995.
So if the workers who produced such gains get a 4% raise, that’s proper compensation, not added or inflationary cost. But 111 million of America’s 129 million working people are not employed in manufacturing but in services such as finance, health care, entertainment, transportation, communications, retail and wholesale distribution.
Yet for those many workers, government statistics report almost no productivity gains. It is as if companies in most of the economy are engaged in business but not earning any real money. That’s not logical and it’s not true.
So we have to look around and see what is really happening in a surprisingly active economy.
In Florida, for example, unemployment in the Tampa-Orlando-Jacksonville area is less than 4%. Companies search for employees to work in the numerous back-office computer operations that have sprung up to serve financial and telecommunications companies in other states. Florida’s cost and tax structure has attracted such operations, explains economist Lynn Reaser of Jacksonville-based Barnett Banks, and now there are labor shortages.
“Or rather there is opportunity for better jobs,” says Reaser. Whenever one of the back-office operations is hiring, workers currently earning less line up to get the higher wages that such jobs pay--$8 an hour and more plus benefits. The resulting increase in those workers’ skills and pay levels represents rising productivity in the economy, although technically it is not recorded as such.
Similarly in the Midwest, United Parcel Service, faced with labor shortages in states with 3% unemployment, is hiring welfare recipients and training them to work.
The company reports that former welfare recipients often are stable employees. And the increase in economic output of a person going from non-work to work represents a powerful productivity gain for the economy.
Yes, but heartwarming as such stories are, what do they have to do with the stock market and big industry? Everything. Nobel Prize-winning economist Gary Becker points out in a recent essay that 75% of the economy is not stocks and bonds but people and their “present and future earnings because of education, training, knowledge, skills and health.”
In other words, as retrained U.S. workers devise new ways to produce more or deliver valuable services at reasonable cost, they deserve to get increased compensation. Wage raises represent growth and incentive, not inflation.
And as to big industry, the phenomenon is probably best understood by taking a look at California, the home of the high-flying technology stocks. As electronics and computer networking have risen to a central role in the U.S. economy, San Jose has replaced such cities as Detroit and Pittsburgh as the manufacturing leader of the country.
New processes, new ideas are raising incomes in San Jose, where employment is growing 5.7% a year, but inflation is less than 2%, reports the UCLA Anderson School Forecast. In Southern California too--even in long-suffering Los Angeles--employment is now growing 3% a year without inflation.
Of course, all this good news on the economy does not mean that the stock market will go back up. Indeed, the time may have come for stocks to go down for a while, says Ken Fisher, head of Woodside, Calif.-based Fisher Investments. But just as in the economy as a whole, “they don’t give clear signals when the market is going to turn,” Fisher says.
Factors causing investors to hesitate are fairly abundant. It is only natural for business costs to be rising and consumer demand to be slowing at this point in the economy’s long expansion.
The consensus of many forecasters is that U.S. companies, which have known a doubling of profits so far in this decade, can look forward to profit gains of 4% to 5% this year. That may not be enough to support continued high stock prices, especially when investors can get more than 6.5% returns in secure 10-year government bonds.
But with productivity growing and world markets expanding, the U.S. economy’s long-term outlook is healthy indeed. And for smart investors, that’s the real issue.
