Productivity Part Two
Last week Max Osbon wrote about the coming productivity surge. This week I am going to write about how good our current productivity is and the key productivity dates coming this Summer. Three days in July might reveal how productivity and the US economy are doing much better than the conventional wisdom believes. At Osbon Capital we are looking at the market reaction ahead of time rather than the actual numbers for insight.
Productivity plays out on two levels – in individual companies one worker at a time and at the macro level across the entire economy. Here is a great article on how one large company, Accenture, is facing the productivity challenge by retraining employees to utilize new technologies. And the soon to be released economic indicators below describe the current state of productivity in the US economy as a whole.
Labor – July 5
The jobs report on the day after our big holiday will be a ho-hum affair. Perhaps job growth will be barely above even, say 50,000 new jobs created. In days past, this would be cause for alarm because it would signal a rapidly slowing economy. However the labor number is no longer given great weight. This is among several changes we’ve seen in numbers-watching over the years, both by the Fed and private analysts. Few people remember how we used to await and act on the money supply growth reported every Thursday after the close in the ’80s. The jobs change number will never go away as a measure, but the puzzling lack of inflation and continued economic growth indicate the measure is flawed in some important way.
Growth – July 26
The first estimate of our second quarter gross domestic product will be released on July 26th. Even if the estimate is low, say 1%, most economists and central bankers will be satisfied. For some years now, central bankers have been aware that their measuring tools are understating productivity in the US. Bankers are skeptical of official productivity numbers because we have such low unemployment AND low inflation. Bankers reason that the US economy is growing closer to 3% or more to provide for job growth. And they reason that productivity must be significantly higher than reported to keep inflation low. Even the Fed has concluded it is too tight and rates are too high.
Inflation — July 31
The Federal Reserve is expected to cut short term cuts rates ½ percent at the end of its meeting on July 30-31. While rate change speculation is a lively sport among forecasters this one is a no-brainer. The two-year Treasury note, the best indicator of the fed funds rate, has already reflected the cut. The two year Treasury note yields 1.75%.
There are a few other market indicators we are looking at that give us confidence in the strength of the US economy. The yield curve is positively sloped if you look at the 2-10 Treasury segment. The 90 day rate, currently at 2.17%, is already down sharply since the beginning of the year. Next, the amount of negative yielding sovereign debt is well below its high. We could see another $2 trillion go negative before the worry signs start. Also, there is NO sign of stress in other bond market segments. If a recession were such a threat we would see some turmoil in other parts of the bond market. Current overall bond market conditions can be described as “calm.” Our conclusion is that a recession outcome is too extreme. The Fed seems to agree.
There is a bear case waiting for investors and it hinges on the US dollar. If we do enter a recession in two years neither the Democrats or Republicans have shown any spending restraint. Our current fiscal deficit of $1 trillion could quickly expand to $2-3 trillion. The dollar would bear the majority of the damage, and would fall. So far, the dollar is down a little, which helps US growth.
There is little to no evidence of inflation. Tariffs have yet to have any material impact. There is significant room for US stocks to go higher over the next two years. There is also room for non-US stocks to go up but not quite as much as the US. The broad reason is that most countries put far less stress on fostering productivity than the US does. Look at our technology and financial sectors to see how positively our technology adoption compares to the rest of the world.
PS – For more on this subject, I recommend reading Dr. Vince Malanga, a guest speaker at a recent Appleton Partners conference, for his experienced and independent analysis.