Productivity Growth Slows Sharply

[bishop]

Productivity Growth Slows Sharply: Financial News - Yahoo! Finance

WASHINGTON (AP) -- Growth in worker productivity slowed sharply in the summer while wages and benefits rose at a rate that was far below a previous estimate. Productivity, the key ingredient to rising living standards, edged up at an 0.2 percent annual rate in the July-September quarter. That was better than the zero change that was first reported, but it was below analysts' expectation for a slightly stronger 0.5 percent increase. The costs of wages and benefits per unit of output increased at an annual rate of 2.3 percent in the summer, a much slower advance than the 3.8 percent rate of increase first reported a month ago. The slower gain in unit labor costs was likely to be greeted with relief at the Federal Reserve, which is concerned that wage pressures could boost inflation. The 0.2 percent growth rate for productivity followed a much stronger 1.2 percent increase in the spring and was the weakest performance since a 0.1 percent decline in productivity growth in the final three months of last year, a time when the economy was being buffeted by the effects of a string of Gulf Coast hurricanes.

layoffs jumped 11% this past november and are expected to increase in the coming months.. as if the slumping housing market hasn't done enough, layoffs only result in lessened consumption, depressed stock prices and calls for even more layoffs - and down the spiral we go...

plus, when labor costs outpace productivity growth, the fed's ability to cut interest rates is lessened - because the inflationary effects of rate cuts are magnified in such a scenario.

and to top it all off, the dollar has been falling yet again. the fed couldn't cut rates in such a scenario, because that would mean that foreign investors would be getting less interest on a depreciating asset (the dollar). and as a consequence, they'd probably buy euros instead, resulting in even worse inflation over here.

the writing on the wall's worrisome, because in this oncoming slowdown, the fed seems incapable of lowering interest rates without worsening the economic situation. and, the federal government can't spend any more than it already is spending (and has been spending for the past 6 years under bush's horrid "leadership").

buckle up folks, and look to protect your investments (401k's, IRA's, etc..)

[PatrickHenry]

Quote by: bishop buckle up folks, and look to protect your investments (401k's, IRA's, etc..)

How can we "protect" paper assets? They only worth what the market says they are...

I can protect my real estate, my tools, my specie, my life...but how do you protect the value of something whose worth is what someone else is willing to pay?

Finance is a house of cards and somebody is jiggling the table.

[bishop]

there are lots of securities out there whose value is extremely stable.. specifically, i would either buy bonds, or value companies.. the former gives you a predefined and virtually guaranteed return. the latter represents companies whose stock price is very stable - i.e. largely immune to the ups and downs of market/business cycles..

these value stocks also tend to pay very large dividends. REITs, utilities, and old companies like GE tend to be classified as value securities. they represent mature companies that aren't growing very rapidly anymore - but they generate huge revenues which are passed back to investors as dividends.

i'm pretty conservative when the market's turbulant, so i tend to buy corporate bonds when things look bearish. even then, i'm still able to make money - whereas i'd lose money if i just kept my portfolio in stocks. there are reasons why people decide not to rebalance their portfolios when the economy seems to be turning south - but those people probably either don't know what they're doing, are irrational, or are greedy.

[JohnMK]

You could also buy inflation-indexed government bonds, my personal favorite for guaranteed purchasing power stability, when and if I want it.

[bishop]

TRIPS are excessively conservative imo.. there are AAA rated corporate bonds out there paying 9-12% coupons.. if you find a corporate with that's close to maturity, i think the risk of default is drastically lowered - if not completely negated.

in down markets, like this past spring and summer, i got in the habit of buying bonds that were maturing in 1-2 month's time. usually they had coupons of roughly 7.5%, so i picked up the last semi-annual payment (3.75%). i picked large banking/financial institutions like citigroup that had loads of cash on-hand. did it a couple times until i went back into the market at the tail end of summer. didn't make me a ton of money, but i definitely fared better than staying on-par with inflation, while protecting my wealth at the same time.

TRIPS are definitely guaranteed, but also a poor choice imo.

[Osborn F Enready]

I think this is a fitting place to post this article.....

Do you agree?

The Evening Bulletin - Economist Williams Decries Government Spending And Regulation

Bryn Mawr, Pa. - Walter E. Williams, a George Mason University economics professor and author, spoke last Thursday at a lecture organized by the Wynnewood Institute on the role of the federal government in a free society. "I'm going to say many things that break with conventional wisdom," he opened in a speech where he advocated private property, free enterprise and state secession. "I'm going to sound mean and uncaring." Fairness and justice are concepts used to justify growing the federal government, Williams said, but the Constitution doesn't give Congress the power to tax for nearly three-fourths of what it spends, such as farm subsidies, food stamps and midnight football. "Some will say, 'that Williams guy is being very narrow and the Constitution is a Living Document,'" he said, but "that is the same as saying we do not have a constitution at all ... How many of you would like to play poker with me [when] the rules are 'living'?" Williams quoted James Madison, known by many as the Father of the Constitution, in 1794 when he said he couldn't find authority for Congress to spend money for the purpose of benevolence. The federal government exists only to protect private property and free enterprise, Williams said. Taxation is crucial, he added, because "Taxes represent government claims on private property." In 1902, federal, state, and local government spending was $1.7 billion and the average citizen paid $60 a year in taxes. From 1787 until 1920, all government spending amounted to three percent of the GNP, except during wartime. Now federal spending alone is $2.7 trillion, Williams said, and state and local spending is slightly over $1 trillion. The average citizen pays $8,000 in taxes per year. From Jan. 1 until May 8, five months out of the year, the government decides how our earnings are spent. Williams likened this to slavery in the sense that someone works all year and someone else decides how the fruits of his or her labor will be used. So in effect, Americans are nearly halfway towards economic slavery. Williams then defined capitalism as a system "where individual liberty was best protected." Individuals may pursue their own self-interests "so long as they do not violate the property rights of others." Capitalism relies on voluntary exchange. Williams also quoted James Madison in the Federalist No. 45: "The powers delegated by the proposed Constitution to the federal government are few and defined" and limited to national defense and foreign commerce. Therefore, the role of federal government in a free society is confined to five things: protection against foreign and domestic threat, adjudication of legal disputes, disbursement of few public goods, and constitutional order. "For the last half century or so, free enterprise has been under unrestrained attack," Williams said. "Americans have contempt for economic liberty." But economic liberty is "threatened not by its failure but by its success." It was so successful in reducing traditional human sufferings such as disease, pestilence, and gross hunger and poverty that Americans no longer became concerned with them but with other problems that they were less willing to tolerate. These include equality, sex and race concerns, and healthcare. To achieve these so-called new rights, Williams said, Americans paid less attention to protecting individual liberty. He cited Social Security's Payroll Tax: "Here is someone telling me and you how much to set aside each week for retirement." He asked what would happen if the government began telling us how much to set aside for housing or food: "The latter is totalitarianism." He added, "I am not saying we're totalitarian yet, but if you ask me which direction we're heading," whether towards liberty or government control, "the answer must unambiguously be the latter." "The primary justification for intrusion into private property and economic freedom... can be found in people's desire for the government to do good... It's nice to think that the government can do good," Williams said. But "government has no resources of its very own... The only way for government to give someone a dollar is, [through] intimidation, threat, and coercion, take that dollar from someone else." To illustrate his point, he asked the audience to imagine what would happen if an individual did privately the same thing the government does. If a person stole from another person in order to help a homeless person, we call that theft, even though it was done out of benevolence. But if the government does the same thing through social welfare, "there is no conceptual distinction between both acts," except that one is illegal theft and the other is legal theft. What is legal is not a good guide for American society because what is legal is not always moral, Williams said. He used slavery as an example of a legal institution that was immoral. "I believe in charity," Williams said. "I believe that reaching into one's own pockets to help your fellow man is praiseworthy and laudable, but reaching in someone else's pockets is wrong."

Check out the entire article. Very good, and significant read.

[RickSp]

Bishop I am not convinced that the revised figures paint quite as gloomy a picture as you suggest. They are certainly preferable to the earlier estimates.

Several economists take the results to suggest that inflation is not nearly the threat that had been feared and that it increased the likelihood that the Fed would cut short term rates again by early spring.

I doubt that a short term rate cut would impact the foreign markets except perhaps to shift slightly more toward longer term investments. We currently have a flat to inverted yield curve as it is, so a cut in short term might not be a bad thing provided that inflation is not an issue.

I think the bumpier ride will be the ripple effects from the weakening housing markets and the rise in defaults in sub-prime mortgages. Time will tell.

[bishop]

it's definitely still up in the air - and i'm still fully invested in stocks right now, so i'm not ready to jump ship yet myself.

that said, the trends in inflation and fx do warrant attention. the fed was able to cut rates after the dotcom bust solely because of the high productivity rates, which greenspan correctly surmised would be able to cushion the inflationary blow of the cuts (the problem, imo, was that they kept them too low for too long). presently, u.s. productivity growth has slowed quite dramatically. during most of the summer, wage growth outpaced productivity... as your article states, businesses are currently sitting tight and holding back spending - a wait and see posture. mass layoffs have begun to increase, particularly this past october. etc....

as changes to interest rates generally take about a year to be fully digested by the system, we have a couple more months of this soft landing to sit through. (plus, nobody's noticed that gas prices are set to rise yet again - which will be passed through into prices.)

the perspective the economists in your article may very well have taken was that businesses still would be reluctant to spend money after the holidays - and the only way to egg them on would be to cut rates. if that is the case, i'd much prefer savings produced through tax legislation rather than increased money velocity.