Posted by: Michael Mandel on November 05
This morning's productivity numbers showed a huge gain in output per hour in the third quarter--up at an annual rate of 9.5% in the nonfarm business sector.
But here's something else. If we are to believe these numbers, the biggest financial crisis since the Great Depression has actually produced a productivity gain of 5.1% since the downturn started in the fourth quarter of 2007.
If you think that productivity has risen by 5.1% during the financial crisis, I've got a subprime bond to sell you.
Let me get this straight. We have a collapse of the housing and construction sector, massive layoffs in almost every part of the economy, a sharp downturn in consumer spending, and bank failures on an astonishing scale---and the numbers show an increase in productivity?
It defies common sense.
I suggest two reasons why the numbers are off. First, as in my recent cover, companies are cutting educated workers such as scientists and engineers who are not directly involved in the immediate production process. This means a drop in important but unmeasured intangible investments in R&D, product development, training, and advertising, which are not getting picked up by the GDP statistics.
Second, and this is relevant to the DC conference mentioned in the previous post, the statistics are being greatly distorted by globalization. Let's take a look at the computer purchases and supply, as reported by BEA.
According to the BEA's number, final sales of U.S.-produced computers has *risen* by 3.9% since 07IV, while imports of computers have *fallen* by 1.5%. Over the same stretch, employment in the computer industry has fallen by 12.5%. Being incredibly simple-minded, that would suggest that productivity in the U.S. computer industry has risen by about 19% in the downturn. Not bad, if true!
But there's a problem. According to the BEA's stats, the price of imported computers has fallen by 9.6% since the end of 2007, while the price of computers to consumers has fallen by 22.2%.
That doesn't make sense. It's far more likely, as I argued here, that the import price stats are mismeasured.
If we assume that import computer prices really fell at the same rate as domestic consumption, that would mean import growth is really faster, and domestic output growth is slower, as is productivity growth. By my back of the envelope calculation, the effect on computer industry productivity growth is potentially huge (I'll give the details later after I have had a chance to check them). This sort of calculation extends to the rest of the economy, though less dramatically.
So for these two reasons, I am quite skeptical of the proposition that the financial crisis has increased output per hour.
Posted by: Michael Mandel on November 05
I'm about to go down to DC to attend this conference (I'm giving the after-dinner remarks as well)
Measurement Issues Arising from the Growth of Globalization
This is a very important conference as we try to figure what is *really* going on in the U.S. economy. I'll be writing more about it.
Posted by: Michael Mandel on November 03
This morning Warren Buffet's company Berkshire Hathaway announced that it was buying Burlington Northern Santa Fe in a deal valued at $44 billion. In the announcement, Buffett called the purchase an "all-in wager on the economic future of the United States."
Is Buffett right that a bet on Burlington Northern is a bet on the economic future of the U.S.? Because if Buffett is right, we've got real problems.
Let's take a look at what Burlington Northern carries. Its major freight revenues (as of 2008) come from coal (23% of revenues); agricultural products (20%); international intermodal shipments of consumer products, which is probably mostly imports (16%); construction and building products (14%); and petroleum products (4%).
In essence, Buffett is betting that the next ten years will look a lot like the last ten: A lot of growth in imports, construction, energy and agricultural products. If he thought that innovation was going to be the driver of the next ten years--biotech, energy, and infotech--he wouldn't be buying Burlington Northern.
I'm not saying that Buffett is wrong. His skepticism about the tech sector in the late 1990s, and innovation in general, turned out to be right on the mark. Berkshire Hathaway stock over the past decade has risen by 84%, whil the S&P 500 is down by 18%.
But his "all-in wager on the economic future of the United States" paints a remarkably gloomy picture of where we are heading.
Posted by: Michael Mandel on November 02
Ford's 3rd quarter earnings report, released this morning, showed a surprisingly large net income of almost $1 billion. The company reported that it:
...reduced its Automotive structural costs by $1 billion in the quarter, largely driven by lower manufacturing and engineering costs, which included benefits from improved productivity, personnel reduction actions primarily in North America and Europe, and progress on implementing its common global platforms and product development processes.
So this leaves two questions: First, how much of these cost reductions came from cuts in intangible investments such as engineering, research and development?
The answer is: The earnings report doesn't tell us. R&D and product development are not broken out separately on a quarterly basis, even though Ford has had an enormous budget for these items ($7.3 billion in 2008, according to the 10K).
Second, is engineering, research and development money being shifted to Ford's overseas operations? Once again, the earnings report is mute on this point. The 10K says
We maintain extensive engineering, research and design centers for these purposes, include large centers in Dearborn, Michigan; Dunton, England; Gothenburg, Sweden; and Aachen and Merkenich, Germany
As Ford makes "progress on implementing its common global platforms and product development processes," it would be good to know the size of the ER&D spending cuts and where they are hitting.
Posted by: Michael Mandel on November 01
One of my favorite commenters, Ajay, writes:
Wow, when the chief economist at Businessweek is capable of writing a sentence like "if U.S.-based companies are doing their research and product development overseas and their production there as well, it's tough to see how ordinary workers in the U.S. will gain," it's easy to see why this magazine was recently sold off for almost nothing, around $5 million, or around $15k per employee as one article estimated. The ordinary worker gains because they can buy goods for cheaper, it's that simple.
Actually, it's not that simple. If one nation improves its capabilities while others stand still, there's nothing about the arithmetic of trade that requires that all nations benefit.
The simplest way to see this is to think about oil. Suppose that a very cheap substitute for oil was discovered in the U.S. Clearly U.S. standard of living would rise, and overall the average global standard of living would rise--but the standard of living in the oil producing countries of the Mideast would fall dramatically.
The parallel here--if China improves its R&D capabilities while the U.S. stands still, there is *nothing* about the arithmetic of trade in a multinational world that requires that Americans will benefit. Nothing.
I stand ready for people to argue with me.
P.S. Hopefully I'm not to blame for BW's sale!
Added November 3: Novartis announced that it is going to invest $1 billion over the next 5 years for a new R&D facility in China. Just a few days earlier, the company announced that overall R&D expenditures were down by 6% over the previous year. You draw your own conclusion about the future path of spending.
