Bad Growth?

(August 9, 2002)Is it possible to have bad growth in the economy? Although most of us would assume that all forms of economic growth are good for the economy and markets, some forms of growth are better than others. The most recent release this morning (8/9) of the productivity statistics for the workers in the U. S. is a good example of bad growth. The report stated that productivity had increased 1.1% in the second quarter. A survey of 59 economists by Bloomberg had been calling for an increase of only .6%. A closer look behind the numbers is less encouraging about how this positive growth in productivity is bad for the economy and markets.

Productivity is a measure of how many (usually people) it takes to produce how much (usually products, like cars). If we can produce more with less, that should translate into many good things such as lower prices, higher profit margins and an expanding economy. The numbers for productivity have been expanding for years, but in the past two years have changed in one substantial fashion. The recent improvements in productivity have come from companies being in a cost cutting mode versus an investment mode.

In an investment mode, like the nineties, companies spent money on capital equipment improvements (computers and machinery) to help the existing workforce become more productive. That’s a great example of good productivity; companies spending money to buy other companies’ products to make their products more efficiently. The current increases in productivity have come from cost cutting. Companies cutting back on capital investments, employees, overtime and hours worked, yet working everyone left a little harder to produce a consistent amount of product. That is an example of productivity that is unsustainable for the long-term and therefore bad productivity.

We can work everyone a little harder for short periods of time, but true expansion in productivity, and the economy, comes from investments in capital spending, not from cost cutting. As we’ve mentioned before, at this point in the business cycle confidence is key. In order for business people to switch back to investing in their businesses from cutting cost, they must feel confident that the markets and the economy are improving. We feel they are and are looking forward to a fourth quarter of data that will confirm our feelings. Part of that confirmation will consist of productivity increases that result from making, not cutting, investments in business.

All sources Bloomberg