GDP, M&A, EBITDA, P/E, NASDAQ, Econo-thread Part 14

[DanS]

I thought you posted from work, Hershell?

[HershOstropoler]

Sure.

[DanS]

The internet is a very useful tool. Here's an article by Robert J. Gordon in 2001 saying that it was a certainty that productivity growth would decline in the next couple of years. In pertinent part...

But there are reasons to doubt that the foundation of the Productivity Miracle can remain intact through the next five years. As a historical fact, productivity growth always contains a temporary component when the economywide output of American workers grows faster than its sustainable rate. This seems to have occurred when real GDP grew by 6.1 percent between mid-1999 and mid-2000. Even the most optimistic estimates of America's sustained growth potential are 4 percent or somewhat lower. If output growth were to slow, productivity growth would also surely slow. [DanS note: cough, hack, wheeze]

And this is what happened. As real GDP growth fell from 5.6 percent in the second quarter of 2000 to 1.1 percent in that year's fourth quarter, productivity growth fell from 6.3 percent to 2.2 percent. As the economy slowed, productivity growth slowed with it. There are several reasons the U.S. economy cannot grow as fast in the next few years as it did during the five-year boom between 1995 and 2000:

An unsustainable decline in the unemployment rate.

An unsustainable increase in our international trade deficit.

An unsustainable increase in stock market prices that in turn fueled unsustainable growth in personal consumption spending.

http://www.cio.com/archive/041501/productivity_con.html

Yet in 2002 we had the best productivity gains since '50...

Of course, I know that it's the primary job of macroeconomists to eat crow all the time, but still...

[Ted Striker]

It's all pretty unsustainable if you ask me

[Kropotkin]

As there, at least to my eyes, seems to be a positive correlation between labour productivity growth and the overall performance of the economy it can indeed be a good time for americans open up the champagne. Unfortunaly, the economic world is rarely that easy to understand, quite the opposite.

As mentioned above, the labour costs have fallen by 2.1 % one quarter. The high figure in LP growth might first and foremost be the result of layoffs. Maybe without positive effects on the economy in the longer run. But who knows? I'm just tossing some ideas into the hat.

[DanS]

OK, here's a Northern Trust chart showing this recovery's productivity against the other post-war recoveries (100 being the recession trough). The opinion expressed is that this recovery was nothing special until last quarter's numbers came in. Since the last quarter's numbers can be revised extensively, I guess some caution is in order.

I note that these averages includes some periods where productivity growth was robust, however. So if it's just average, that's pretty good news.

[HershOstropoler]

I suppose we'll see some inventory effects in q3 and q4, so the whole thing might look good on paper.

The really interesting question will be where the US economy is once it has rebealanced, ie a return to normal interest rate levels, a budget deficit of maybe 2-3 % and a balanced foreign account.

[DanS]

What a great political show!

Warren Buffett endorses Arnold Schwarzeneger for governor of California and becomes his economic adviser.

Warren Buffet to add muscle to Arnie's team
By Christopher Parkes in Los Angeles
Published: August 13 2003 22:14 | Last Updated: August 13 2003 22:14

Arnold Schwarzenegger has named billionaire investor Warren Buffett as his economic adviser, causing yet another sensation in California's recall election melee.

His role will be to help the amateur politician build a team to help him fulfil his promise to lead the state out of its fiscal crisis.

"I have known Arnold for years and know he will be a great governor," Mr Buffett said. It was critical to solve the economic crisis and he said he believed the actor, who has no electoral or practical political experience, would "get the job done".

California recall

Mr Buffett has given money financial backing to Democratic politicians including Hillary Clinton, although his enduring adherence to his dictum--never invest in a business you cannot understand--suggests he has considerable faith in his 56-year-old Republican protege.

Mr Buffett's endorsement came shortly after president George W. Bush repeated his guarded suggestion that Mr Schwarzenegger would make a good governor, and within days of the first public indication that the man now known as "The Governator" even knew "The Sage of Omaha".

Statutory filings on his income and receipt of gifts worth more than $50 revealed Mr Buffett had once given him a coffee table book worth $75.

Announcement came after days of intense scrutiny and criticism of Mr Schwarzenegger's lack of concrete plans for overcoming the state's considerable difficulties.

A moderate Republican and a popular public figure, he is seen as the greatest threat to the survival of Gray Davis in the October 7 recall election.

Last week, he shook the Democratic camp and political pundits and reporters - when after two weeks of hints that he would not run - he announced his candidacy during the taping of a late night talk show.

At the last count, he was one of 115 candidates confirmed for the ballot. The final tally from the 247 who filed papers was expected to be announced on Wednesday night.

[el freako]

Originally posted by DanS
The internet is a very useful tool. Here's an article by Robert J. Gordon in 2001 saying that it was a certainty that productivity growth would decline in the next couple of years. In pertinent part...

Yet in 2002 we had the best productivity gains since '50...

Well, using the GDP per man-hour across the whole economy measure of productivity growth, and bearing in mind that he said that before any data for 2001 was in...

Growth in US GDP per man-hour, whole economy:

2002: 3.1%
2001: 0.9%
1996-2000: 2.3%

So 2001 looked pretty bad and the rapid productivity growth in 2002 was just the catchup from that.

[Ted Striker]

Originally posted by DanS


What a great political show!

Warren Buffett endorses Arnold Schwarzeneger for governor of California and becomes his economic adviser.

whoah

w

[DanS]

OK, is Robert Gordon changing his tune? He seems like he's turning into a new economy Euro-basher weenie.

In FT...

America wins with a supermarket sweep
By Robert Gordon
Published: August 19 2003 20:06 | Last Updated: August 19 2003 20:06

Growth in output per hour, better known as productivity, is the life blood of economic progress. It makes an enormous difference whether productivity grows at 3 per cent or 1 per cent a year, with the higher number implying a doubling of society's average standard of living in a single generation and the lower number implying that it will take three generations for the same doubling to occur.

For most of the period since 1970, the US was in the back seat, with its productivity growth chugging along at a mere 1.4 per cent a year, while Europe grew at well above 2 per cent. But starting in 1995 something extraordinary happened. America's productivity growth speeded up while Europe's slowed. A host of research studies attributed most, if not all, of the US's surge to its dominance in making computers and developing software. Intel and Microsoft are familiar names that symbolise US dominance in the information and communications technology (ICT) sector.

But this alleged superiority of the US in ICT raises a host of puzzles. Intel and Microsoft make chips and software in Ireland and elsewhere in Europe, and in many branches of ICT Europeans compete vigorously. And what about the "C" in ICT? Everyone knows that Europe is far ahead in mobile phones and outfoxed the US early on by adopting a common GSM standard, while Americans were hobbled by a patchwork of incompatible standards. Two of the three big names in worldwide mobile telephony are Ericsson and Nokia, after all.

Two weeks ago the productivity puzzle suddenly deepened when the US government revised upwards its productivity numbers for the past two years and provided its first release for the second quarter of 2003, which came in at an unbelievable 5.7 per cent. The underlying long-run trend of productivity growth is currently running at about 2.8 per cent a year, fully double the pre-1995 growth rate.

So we face a new paradox. Those research studies that attributed the 1995-2000 revival of US productivity growth to the ICT investment boom of the late 1990s have some explaining to do. After 2000, the ICT investment boom collapsed along with the stock market but productivity growth accelerated. If ICT growth collapsed but productivity growth increased ever faster, something else besides ICT investment must have been behind the American miracle.

Part of the answer is that the research studies are flawed. Somewhat unbelievably, they assume that a piece of computer hardware or software had its full impact on productivity the day it was produced, back in 1998 or 1999, before it was even delivered to the user. But almost all of us took a long time to learn how to use the hardware and especially the software. Who among us can claim to have been as proficient at using Microsoft Word, Excel and PowerPoint on our first day as we are today after long and painful learning? So the studies exaggerate the benefits of ICT investment during the boom years of the late 1990s and understate the delayed benefits in the new century.

Another, related answer has been suggested by Shinkyu Yang and Erik Brynjolfsson, the Massachusetts Institute of Technology economists. They view ICT investment as an iceberg, with a visible part that is measured by the government but a hidden part under water consisting of "intangible" productivity-yielding activities. These comprise such things as reorganising and reinventing business practices, and both formal and informal training of computer and software users. During the late 1990s, both parts of the iceberg were growing rapidly and hordes of programmers, consultants and trainers were hired to produce the hidden intangibles. Productivity growth - that is, output per hour - was understated because the output numerator was missing the intangibles, while the denominator included all those hours of work devoted to producing the intangibles.

Then, after the ICT boom collapsed, the tables turned. All that valuable intangible investment was in place and it helped companies to produce ever more output with fewer production workers. On top of that the hordes of programmers, consultants and trainers were fired and are now walking the streets in search of jobs. So output has been growing while employment has been shrinking, producing the explosion of productivity growth that we observe in the American data.

Where does Europe fit in? The data show that Europe's performance is worst in those industries that are heavy users of ICT, especially retail trade, which just happens to be where the US's productivity showing is strongest. America's retail productivity performance has all been achieved in stores newly built since 1990, not in existing stores.

The new stores are the "big boxes" such as Wal-Mart, Home Depot and Best Buy, large new buildings set up on greenfield sites at interstate highway junctions, in suburbs and, increasingly, in inner cities. As these new stores reap the rewards of their size, openness and accessibility and drive smaller stores out of business, they bolster the average productivity of the US retail sector as a whole.

While countries differ, Europe has many ways of stifling modern retailing, from green belts and land-use restrictions to laws that prevent companies from lowering their prices. These make life difficult for new, more efficient retailers in order to protect small, traditional merchants. This is one of many cultural chasms across the Atlantic. Many Europeans could not care less about retail productivity and instead are adamant that Europe must avoid the US's unregulated land use and starvation of public transport, which have produced its overly dispersed, energy-wasting metropolitan areas.

Europeans spent most of the postwar era catching up with the US; and indeed a number of European nations have exceeded the level of the US's productivity. But if the recent disparity in growth rates continues, Europe will sink back steadily and will be forced to ask how long it can afford to protect the old and ignore the new.

[DanS]

Ecthelion: Here's your ranking of economies. Luxembourg must be a really nice place!

http://www.odci.gov/cia/publications/factbook/rankorder/2004rank.html

[The Vagabond]

Thanks for the reference, Dan.

Wow, this table gives a pretty high figure for Russia (more than I expected). Well ahead of Lithuania Saras,

Another surprise for me was Ireland. I thought it was one of the four poorest EU countries (along with Spain, Portugal and Greece). But hell, it turns out to be the richest EU country (next only to Norway, and I don't count artificial paradises like Luxembourg).

[The Vagabond]

I have a question about productivity. It is common knowledge that Americans work much more hours than the Euros. Is this taken into account when productivity is evaluated? Or is it only the "official" hours that count?

[DanS]

Ireland has been rising for a good while now. I like to see it, since they have had very hard economic times for centuries. ef's adjusted GDP per head figures put Ireland even higher than does the CIA. It's quite possible that Ireland will surpass the US in GDP per head in the next couple of years.

Re productivity, yes the add'l hours that Americans work is fairly well known, and it is baked into the cake. I don't know where the output per hour numbers stand right now US v. Europe, but a couple of years ago those were about even for several of the bigger European economies. Maybe the US is ahead slightly now after the last couple of years.

Re Russia, it has a lot of potential, if a couple of things are cleaned up. However, CIA appears to be using different PPP's than others, giving Russia a couple thousand $ boost.