Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
Investment Management Economic and Financial Market Commentary February 21, 2014 Behold! Once again, weather is clouding the economic outlook. We won’t know for several months whether there is a true economic slowdown underway, or if consumption and production measures have been primarily depressed by an abnormally harsh winter in many parts of the country. (Ask any grumpy New Yorker and you will get a resounding yes!) But there is a more important story unfolding which is quite positive for the U.S. economy. Productivity growth has bounced back closer to a more normal 2% growth rate after three years (2010-12) of sub-par growth of <1%. It is a development to behold, as this rebound has profound implications for prospective economic growth, inflation, and monetary policy. Y-O-Y % Productivity Growth On the Rise Again Annualized Average Productivity Growth 7 6 50-Year 2.0% 5 25-Year 2.2% 3 10-Year 1.7% 2 5-Year 2.1% 3-Year 1.0% 1-Year 1.7% 4 1 0 -1 88 93 Sources: Bloomberg and BBH Analysis 98 03 08 13 Sources: Bloomberg and BBH Analysis Let’s return to Economics 101 for a moment. Recall that the growth of any economy can only be derived from more labor or capital inputs and improved productivity. A factory can only make more widgets if it has more workers making widgets, and/or if its workers become more productive. The same is true for any economy in the world. For most developed and many developing economies (like China), labor force growth has been challenged by decades of declining birth rates, and so most of what drives economic growth is productivity advancements. You can also think of productivity growth as the means by which societies advance their standards of living. The translation of changes in productivity growth to changes in standards of living is exponential, not linear. An example below illustrates the power and importance of small changes in productivity growth. brown brothers harriman www.bbh.com 1 Economic and Financial Market Commentary / February 21, 2014 Rising Standard of Living Some investors are familiar with the “Rule of 72”, The Power of the Rule of ‘72 100% which is a handy way to calculate how long it takes to 72 Years 1% double your money at a given rate of return (e.g., 36 Years 75% 2% 9 years to double your money at an 8% annual return, 24 Years 3% or 18 years to double your money at a 4% annual 18 Years 50% 4% return). The “Rule of 72” framework can also be used 9 Years to determine how long it takes for a society to double 8% 25% its standard of living. At a 2% rate of productivity growth (as evidenced over time in the U.S.), it takes 0% 0 10 20 30 40 50 60 70 80 36 years to double a country’s standard of living. At Years For illustrative purposes only Source: BBH Analysis 1.0% rate of productivity growth (as evidenced in Japan and Western Europe), it takes 72 years to double a country’s standard of living. Finally, at a 10% rate of productivity growth (as evidenced in China over the past decade), it takes only 7 years to double a country’s standard of living. Small changes in productivity over the long term bring profound changes within an economy. Of course, there can sometimes be a dark side to faster productivity – slower growth in employment. If companies can achieve their growth objectives through higher productivity (e.g. efficiency gains and incremental investment), they may not choose to add labor to achieve higher output. This may partially explain the still-anemic labor market gains evidenced in the U.S. over the past five years where productivity growth has averaged 2.1%. But there have also been other periods – 1995-2000 – where higher productivity growth went hand-in-hand with faster employment growth. The latter did put pressure on wages, but this pressure was offset by higher productivity leaving Unit Labor Costs, the key driver of broader inflation pressures in the economy, well behaved. Unit Labor Costs Not a Threat As Productivity Rebounds Annualized Average Unit Labor Costs Change Y-O-Y % 6 50-Year 3.1% 25-Year 1.4% 0 10-Year 1.1% -2 5-Year -0.2% -4 3-Year 1.2% 1-Year -1.3% 4 2 -6 88 93 Sources: Bloomberg and BBH Analysis 98 03 08 13 Sources: Bloomberg and BBH Analysis All else equal, the faster is productivity growth, the slower are Unit Labor Costs and the better controlled is inflation. Fed policymakers dream of an environment of robust economic growth driven by robust productivity gains, as this tends to restrain advances in labor costs, and overall inflation. No one would describe today’s environment as robust, but even moderate economic growth, driven mostly by decent advances in productivity, are surely limiting the growth in employment, limiting the growth in worker compensation, and ultimately, limiting the pace of inflation. brown brothers harriman www.bbh.com 2 Economic and Financial Market Commentary / February 21, 2014 The Fed wants it all – a strong economy, a strong labor market, and low inflation. Don’t we all. This trio of goals is surely achievable if productivity growth remains solid and companies eventually decide to augment productivity gains with more labor inputs in order to maximize their output. Time will tell if the recent rebound in productivity growth is sustainable, but the recent trends are more promising after a concerning period of anemic advances earlier in this expansion. Jeffrey A. Schoenfeld Partner IM-2014-02-21-0963 Research: Jorge Aseff Production: Brian Ehrlich Past performance is no guarantee of future results. This publication is a general guide to the views of Brown Brothers Harriman & Co. and is provided to recipients who are classified as Professional Clients and Eligible Counterparties if in the European Economic Area (“EEA”), solely for informational purposes. This does not constitute legal, tax or investment advice and is not intended as an offer to sell or a solicitation to buy securities or investment products. Any reference to tax matters is not intended to be used, and may not be used, for purposes of avoiding penalties under the U.S. Internal Revenue Code or for promotion, marketing or recommendation to third parties. This information has been obtained from sources believed to be reliable that are available upon request. This material does not comprise an offer of services. Any opinions expressed are subject to change without notice. Unauthorized use or distribution without the prior written permission of BBH is prohibited. This publication is approved for distribution in member states of the EEA by Brown Brothers Harriman Investor Services Limited, authorized and regulated by the Financial Conduct Authority (FCA). BBH is a service mark of Brown Brothers Harriman & Co., registered in the United States and other countries. © Brown Brothers Harriman & Co. 2014. All rights reserved. 0122014. brown brothers harriman www.bbh.com 3