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Thursday, May 06, 2004 5:50:31 PM
John Rutledge
Productivity Growth Trumps Inflation
By John Rutledge
Special to RealMoney.com
5/6/2004 2:03 PM EDT
URL: http://www.thestreet.com/p/rmoney/johnrutledge/10158829.html
Economic Analysis
• Productivity gains drive the economy.
• Communications technology helps big companies.
• Output will keep rising, and profits will follow.
Productivity growth is driving the economy. This morning's preliminary first-quarter report on productivity and costs shows the driving force behind resurgent U.S. growth. A tidal wave of productivity growth, caused by advances in communications technology, is raising output per hour of work.
U.S. business-sector productivity rose at a 4.5% rate in the first quarter, which is 5.5% higher than the first quarter a year ago. Manufacturing productivity rose 3.1%, a rate that's 5.3% higher than a year ago. Durable-goods manufacturing rose an incredible 5.9%, up 7.4% from a year ago.
Increasing productivity also lowers costs and increases profits. And it reduces an employer's need for workers unless matched by an increase in customer demand. In the last year, business-sector employers have increased output by 5.8% and increased hourly wages by 4.2%, with just a 0.2% increase in worker hours. This pushed unit labor costs -- labor costs per unit of final product -- down 1.3% for the year. In durable-goods manufacturing, the results are even more striking: Output increased by 5.7%, employee hours worked fell 1.6%, which drove costs per unit down 2.4%.
Not all companies are created equal. Big companies -- those best positioned to capitalize on high-speed telecommunications and most able to deploy fast communications networks -- knocked the cover off the ball.
New data show that in the fourth quarter of 2003, nonfinancial corporations increased productivity by 6.2% and increased output by 5.4%, while shrinking employment by 0.7% and reducing labor costs per unit of product by 1.9%. As a result, profit per unit increased an incredible 27.1% for the quarter.
The full-year numbers are even better. In 2003, U.S. nonfinancial corporations increased productivity by 5.7%, the largest increase in the history of the series, which goes back to 1959. Output grew 4.2%, employment fell 1.5%, unit labor costs fell 1.5% and profit per unit increased 20.5%.
This report is extremely important for two reasons. First, it shows why the fears about strong job growth, rising inflation and rising interest rates that pushed bond yields up by 50 to 70 basis points last month are unwarranted. Demand is not growing quickly enough to offset the incredible growth of productivity that is driving the growth of the U.S. economy. Output will continue to rise, but job growth will remain subdued, labor costs will continue to fall, inflation will remain under control and profits will continue to grow.
Second, this is just the beginning of the productivity story. As the numbers above show, productivity gains to date have been concentrated among large corporations. The high-speed communications systems the big companies used to improve operations simply were not available to small companies.
That is changing dramatically. President Bush has announced that he will make universal broadband access by 2007 a national priority. The Kerry campaign has similar plans. Congress is gearing up to rewrite the telecom law to improve incentives for telecom investments once the elections are over. Every major telecom company has a business plan that focuses on bringing broadband to small towns, small businesses and homes.
We are going to see a second great wave of productivity growth in the next five years as small companies get competitive. This means rising output, falling costs, low inflation, rising profits and low interest rates are going to be with us for a long time. This is a great environment for equities.
—————————————————————————————————————————
Dr. John Rutledge is the chairman of Rutledge Capital, a Greenwich, Ct.-based private equity investment firm, and of Rutledge Research, a Virginia-based economic advisory firm. He also serves as chairman of the advisory boards of the B.V. Group, a venture capital, hedge fund and real estate investment firm, and Saugatuck Capital, a middle-market private equity firm
Productivity Growth Trumps Inflation
By John Rutledge
Special to RealMoney.com
5/6/2004 2:03 PM EDT
URL: http://www.thestreet.com/p/rmoney/johnrutledge/10158829.html
Economic Analysis
• Productivity gains drive the economy.
• Communications technology helps big companies.
• Output will keep rising, and profits will follow.
Productivity growth is driving the economy. This morning's preliminary first-quarter report on productivity and costs shows the driving force behind resurgent U.S. growth. A tidal wave of productivity growth, caused by advances in communications technology, is raising output per hour of work.
U.S. business-sector productivity rose at a 4.5% rate in the first quarter, which is 5.5% higher than the first quarter a year ago. Manufacturing productivity rose 3.1%, a rate that's 5.3% higher than a year ago. Durable-goods manufacturing rose an incredible 5.9%, up 7.4% from a year ago.
Increasing productivity also lowers costs and increases profits. And it reduces an employer's need for workers unless matched by an increase in customer demand. In the last year, business-sector employers have increased output by 5.8% and increased hourly wages by 4.2%, with just a 0.2% increase in worker hours. This pushed unit labor costs -- labor costs per unit of final product -- down 1.3% for the year. In durable-goods manufacturing, the results are even more striking: Output increased by 5.7%, employee hours worked fell 1.6%, which drove costs per unit down 2.4%.
Not all companies are created equal. Big companies -- those best positioned to capitalize on high-speed telecommunications and most able to deploy fast communications networks -- knocked the cover off the ball.
New data show that in the fourth quarter of 2003, nonfinancial corporations increased productivity by 6.2% and increased output by 5.4%, while shrinking employment by 0.7% and reducing labor costs per unit of product by 1.9%. As a result, profit per unit increased an incredible 27.1% for the quarter.
The full-year numbers are even better. In 2003, U.S. nonfinancial corporations increased productivity by 5.7%, the largest increase in the history of the series, which goes back to 1959. Output grew 4.2%, employment fell 1.5%, unit labor costs fell 1.5% and profit per unit increased 20.5%.
This report is extremely important for two reasons. First, it shows why the fears about strong job growth, rising inflation and rising interest rates that pushed bond yields up by 50 to 70 basis points last month are unwarranted. Demand is not growing quickly enough to offset the incredible growth of productivity that is driving the growth of the U.S. economy. Output will continue to rise, but job growth will remain subdued, labor costs will continue to fall, inflation will remain under control and profits will continue to grow.
Second, this is just the beginning of the productivity story. As the numbers above show, productivity gains to date have been concentrated among large corporations. The high-speed communications systems the big companies used to improve operations simply were not available to small companies.
That is changing dramatically. President Bush has announced that he will make universal broadband access by 2007 a national priority. The Kerry campaign has similar plans. Congress is gearing up to rewrite the telecom law to improve incentives for telecom investments once the elections are over. Every major telecom company has a business plan that focuses on bringing broadband to small towns, small businesses and homes.
We are going to see a second great wave of productivity growth in the next five years as small companies get competitive. This means rising output, falling costs, low inflation, rising profits and low interest rates are going to be with us for a long time. This is a great environment for equities.
—————————————————————————————————————————
Dr. John Rutledge is the chairman of Rutledge Capital, a Greenwich, Ct.-based private equity investment firm, and of Rutledge Research, a Virginia-based economic advisory firm. He also serves as chairman of the advisory boards of the B.V. Group, a venture capital, hedge fund and real estate investment firm, and Saugatuck Capital, a middle-market private equity firm
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