FORECASTS & TRENDS E-LETTER
by Gary D. Halbert
April 4, 2017
- US Private Sector Productivity Actually Declined Last Year
- Sluggish Productivity Growth is Now a Worldwide Trend
- “Robo-Advisors” – What Are They & Do You Need Them?
- Alpha Advantage Webinar Recording Now Available
One key measure of US economic productivity actually declined in 2016 for the first time since the depths of the Great Recession in 2009. The amount of goods and services produced, versus the total inputs of labor and capital to produce them, declined slightly last year for the first time in seven years. We’ll look at the reasons why below.
This troubling trend is not limited to the United States. In fact, the latest drop in US productivity is part of a recent worldwide trend of sluggish productivity growth among rich countries, and economists are still not sure why it’s happening. We will explore the prevailing theories for why this is happening as we go along today.
The debate over how to increase productivity, and increase living standards, is currently focused on the development of robots. There is a great deal of uncertainty (and fear) about the growing trend towards the use of robots to perform human tasks. I will speak to these concerns and argue that we should not fear the trend towards robotics.
Finally, I will also address the issue of “Robo-Advisors” and whether or not they make sense for most investors. In my view, they do not. I’ll give you my reasons in today’s E-Letter. Finally, a recorded version of the webinar we had last Thursday with Alpha Advantage and its Portfolio Manager Paul Montgomery is now available. If you were not able to attend the live webinar, you don’t want to miss your chance to watch it now. That’s a lot to cover, so let’s get started.
US Private Sector Productivity Actually Declined Last Year
The Labor Department reported last Thursday that US private sector productivity – the amount of goods or services produced, versus the total inputs of labor and capital to produce them – declined 0.2% in 2016 for the first time since the depths of the Great Recession in 2009.
The so-called Multifactor Productivity Index for 2016 reflected a 1.7% increase in total output last year but with a 1.9% increase in the combined inputs of labor and capital, for a net productivity decrease of 0.2%. This key measure of productivity differs from the more commonly watched worker productivity per hour index, but is still very important.
Here’s why. On March 8, the Labor Department reported that US worker productivity, or average output per hour, increased a modest 1.0% in 2016. Yet the Multifactor Productivity Index of output versus input decreased 0.2% at the same time.
What this means in simple terms is that US workers produced more goods and services but did so less efficiently. Or put differently, this means that it took more workers to produce the same amount of goods as the year before.
Here’s another way to think about it. Our anemic GDP growth of only 1.6% in 2016 was largely caused by companies hiring more people and buying more machines and software, not by improvements in technology or organization that allows companies to squeeze more out of the resources they already have.
In other words, the economy has on average actually gotten less efficient. Americans made more stuff in 2016 only because we had more people working and more tools for them to use, according to the Labor Department’s latest report. Productivity in terms of output versus input got worse.
Sluggish Productivity Growth is Now a Worldwide Trend
Sluggish productivity is not news any modern economy wants to hear, especially as America looks at a future of declining birth rates and a shrinking workforce. If the nation wants more economic growth, it will quickly need to find ways of producing more with fewer people (ie: higher productivity).
This troubling trend is not limited to the United States. In fact, the latest drop in US productivity is part of a recent worldwide trend of sluggish productivity growth among rich countries, and economists are still not sure why it’s happening.
There are two prevailing theories. Perhaps the most common is that the drop-off in productivity in recent years is simply the hangover from the Great Recession and the financial crisis of late 2007-early 2009. That’s a plausible theory… except that this is 2017, a little late for a hangover.
The other theory, advanced by pessimists like Northwestern University professor Robert Gordon, is that the vast benefits from computers petered-out in the 2000s – and since then the world has come up short on innovative new technologies. That is to some extent true.
Yet optimists argue that we are currently in a so-called “incubation period” and that the next big wave of innovative breakthroughs is just around the corner. They most often point to the surprising breakthroughs in robot technology and argue that this next major wave of change could come rapidly. I tend to agree.
Many Americans have a fear of robots and other advancing technologies, and worry that they could lose their jobs to these machines as technology advances. I don’t share those fears for a number of reasons.
First, in order to have robots on a large scale, this will require more and more engineers to design and build them. Engineers are in short supply (my son is one), and the engineering field is experiencing a significant increase in demand.
Likewise, there will be a big increase in demand for software programmers for the robots and all sorts of new human jobs – many of which we don’t even know about yet – to develop, support and maintain them.
With our aging population and shrinking workforce, I am confident we’ll need robots, as well as more working-age Americans in the workforce, if we are to see productivity rebound in the next decade or so. I’ll come back to robots just below.
In closing on this subject, we hear many in the media who want us to believe that the current drop-off in productivity is permanent, and that there’s little we can do to reverse it. While we can’t definitively rule out that conclusion, there is much historical evidence to question it.
Even in the first few decades of the Industrial Revolution – the greatest economic change that has ever happened in modern history – productivity growth was slow and some historians believe that living standards initially fell during that era.
It took nearly half a century until breakthroughs like the steam engine made a real dent in people’s lives. When technology was harnessed to power trains and generate electricity, living standards vaulted higher. Despite periodic slowdowns in productivity, Americans have always prevailed, and I have little doubt we will do so again.
“Robo-Advisors” – What Are They & Do You Need Them?
My comments above regarding robots and our future with them provides the perfect opportunity for me to address the issue of Robo-Advisors. I assume that most of my clients and readers have heard this term in the financial media over the last year or so.
Robo-Advisors are an emerging class of financial advisors that provide financial advice and/or portfolio management online