Productive Ignorance


U.S. productivity growth last quarter blew out expectations and labor costs barely budged. This is a big deal. While the raw data is being reported widely in the financial press today, they just don't seem to get the true bullishness of this result.

1Q Productivity Solid, Labor Costs In Check
By Brian Blackstone, Morningstar

Productivity is a measure of the amount of output per unit of input. In real world terms, it's how much an employee produces for each hour of work. Productivity rose at an annual rate of 1.7% last quarter, according to the Labor Department. And according to a Bloomberg economist survey, this was more than twice the projected pace. Meanwhile, the cost of labor rose a mere 0.6% in the period.

Two words of caution here before we proceed: First, this is backwards-looking data and says virtually nothing about what the future might hold. Second, one quarter's worth of data is far too erratic to make prognostications on.

That said, these numbers are highly consistent with the longer term trends of moderate inflation, low unemployment and rising productivity. Today's global economy is hitting on all cylinders— robust growth, low unemployment, low inflation, growing productivity, and growing personal wealth.

Traditionally, low unemployment means a tight labor market and rising labor costs, which in turn translates into higher prices for goods (aka inflation). But the presence of productivity growth helps keeps prices down. We seem to be in the midst of a global productivity boom that's lasting much longer than most pundits expected, which in turn has lead to lower inflation than most expected. How?

It's sheer folly to try and reduce such big, multi-dimensional results of the world economy to a single outcome. But it's worth highlighting two familiar themes we've mentioned often in this space: Technology and Globalization. (See our past commentary, "Production Junction; Market Functions").

We continue to believe most folks are unable to fathom the degree to which advances in technology and globalization are fueling spirited bouts of Schumpeterian creative destruction throughout the world. These features are creating abundant value, wealth, and stability not likely to abate in the near future.

The key to productivity is understanding how wealth and growth are created in a market-based economies. One of best and only ways to create new value in an economy is through increases in productivity. Simply creating more of something isn't all there is to growth—much of the genesis of wealth is done by creating more of something for less than it cost before.

Here's an extreme way to think about the issue: if we could develop one machine that could do everything, produce all the goods and services we desire without a one of us lifting a finger, unemployment would be 100%. But productivity would be infinite and thus we'd all essentially be wealthy without having to work.

In the real world, economies must be dynamic. There is an interplay between job creation and destruction that goes along with productivity. Globalization and technology are huge boons, yes, but they also have the seemingly nasty habit of destroying whole industries with innovation. For example, once upon a time US agriculture represented the majority of US employee labor. Today, it's less than a couple percent of the workforce. Yet, we're producing more food than ever, and for cheaper due to vast productivity gains.

Isolationists who want to "protect" workers or industries with regulation are in the long term are destroying both. Allowing the productive cycle to take its course ultimately raises the wealth of entire societies, agnostic of borders and class.

So, wealth creation itself destroys the old and forces us to seek the new, to be dynamic. This can only be accomplished today through a globally linked economy, free of harmful regulation.

Increasing productivity helps form a virtuous cycle that creates wealth and pushes economies forward. Oh and by the way, increasing productivity is also very bullish for corporate earnings and stock returns.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.