a better than average recovery
A month or so ago, I wrote about the thesis of Jim Paulsen, the chief investment strategist for Wells Fargo, that the US is actually doing a bit better than average for economic recoveries over the past twenty-five years. The perception that the economy is relatively weak comes, in his opinion, from comparing apples with oranges–from comparing this recovery with all post-WWII economic rebounds, not with those of the last quarter century. This latter group, however, are the only ones that occurred with an economy like we have in the US today.
Anyway, I’m suddenly on the mailing list for Dr. Paulsen’s monthly commentary (Thanks, Wells Fargo!).
a new angle
In his December comment, Dr Paulsen expands on his idea of a “back-loaded” economic recovery. I don’t necessarily intend to talk about Dr. Paulsen every month, but I think he is making some interesting points. They argue that we will be seeing accelerating economic performance out of the US economy in the months ahead.
women entering the workforce
In a nutshell, Dr. Paulsen’s November observation is that the US economy of the 1950s through the mid-1980s had a faster potential rate of growth than we have today because in the earlier period the large-scale entrance of women into the workforce acted as a significant tailwind that we no longer have.
the effect of inflation
In his December commentary, Paulsen makes the additional observation that the switch from the inflationary mindset of the Seventies and early Eighties to a disinflationary one of the Nineties and beyond also has a significant effect on the behavior of corporations. As he puts it, in the earlier period, “sales always rose and prices could always be increased.” Therefore, it made no sense to worry about staffing levels or the size of inventories. Price increases would always ensure that companies could report a satisfactory, and rising, level of profits.
The world has changed dramatically since the Sixties and the Seventies. The Fed’s thirty year long fight against inflation has stamped out in customers’ minds the idea that prices inevitably rise. In the new environment, a company has got to concentrate on keeping costs low and increasing productivity. Hiring increases and capacity additions come only as a lost resort.
In my view, Dr. Paulsen’s observation about inflation is basically correct. In fact, the old inflation-prone world of the Seventies is so foreign to today’s experience that it’s hard for people who didn’t experience it to comprehend how or why the economy ran the way it did back then.
But there are also a lot of other things different about the Sixties and Seventies:
–the industrial firms in Europe and Japan were still rebuilding after WWII
–trade barriers were much higher than today
–therefore, there were far fewer true multinationals, who aimed at selling large amounts of stuff at moderate prices all around the world
–electronic products, where performance always gets better while prices decline, were a much smaller percentage of industrial production
–the rate of technological change was much slower (so fewer worries that bloated inventories might become obsolete)
–there was no Internet and no online commerce
–there was no supply chain management software, so managements had little of today’s ability to analyze and control operations.
Yes, the Fed’s actions in the Eighties destroyed expectations of inexorably rising prices. But the world is much more complex now. Change is faster and competition is much more intense. So cost control and productivity increases are essential for firms to remain competitive. And today’s managements have powerful tools that allow them to dramatically curtail operations–as they did in late 2008 and early 2009–confident that this is the profit-maximizing thing to do.
Today’s coin has another side, however. Cost cutting and squeezing more output from a given amount of capital equipment can only go so far. At some point, firms have to add people and plant in order to continue to grow.
Jim Paulsen thinks, and I agree, that we’re now at that point in the current recovery. Productivity growth has been slowing for a while. And there’s substantial evidence that companies are beginning to hire at a faster rate. If so expect profits for publicly listed companies to accelerate in the months ahead.