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Retired chief investment officer and former NYSE firm partner with 50 plus years experience in field as analyst / economist, portfolio manager / trader, and CIO who has superb track record with multi $billion equities and fixed income portfolios. Advanced degrees, CFA. Having done much professional writing as a young guy, I now have a cryptic style. 40 years down on and around The Street confirms: CAVEAT EMPTOR IN SPADES !!!

Friday, June 17, 2011

Productivity & Profits

This post builds on the Tue. 6/14 post (immediately below).

I use a very conservative method for computing productivity in the US economy. The work shows
there has been a modest trend of improvement in worker productivity over the past 20 years. What is
interesting about the current cycle is how rapidly productivity has moved up to a new longer term
high level in just two short years. Looking back in time, cyclical improvements in productivity tend
to take quite a bit longer. The current level of output per worker is not high enough compared to
the 2007 - 2008 period to warrant concern that business is deeply short handed. The same can be
said about a comparison of the level of output per worker now with the 2000 cyclical peak. Yet,
looking forward, extending the current rapid trend of productivity improvement out just two more
years would yield worker unit output levels that would be dramatically, and perhaps, suspiciously
above levels seen over the longer run.

What is even more striking is that over the past 25 years, workers have not been compensated
at rates nearly in line with the growth in current $ unit sales. Moreover, since senior level
management compensation has expanded extremely rapidly, we know that the benefits of higher
productivity growth have been concentrated in the hands of a relatively few. (Since 1985, unit
sales in current $ have expanded by 47% while the comparble figure for total compensation
has expanded by only 38%). I think that this rapidly growing plutocracy will ultimately undermine
US growth and stability over the long term, although there any number of economists who would
take issue with this view.

Even so, the continuing imbalance between the growth of unit sales and profits and that of total
compensation may well constrain profits growth down the road if US consumers maintain a
reluctance to finance spending with credit and line up spending more closely with income

Obviously, I would be much happier with a better balance of jobs and incomes growth compared
to profits growth as I think that investors will ultimately price a growing plutocracy at a
substantial p/e ratio discount to a more balanced distribution of rewards within our economy.

Ok, sermon over.

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