Quarterly Letter to Clients - April 2016
In many past letters, we have noted the importance of increases in productivity, or output per man-hour worked, not only for improvements in the standard of living of our citizens, but also for the strength and growth of the economy.
Robert Gordon, a professor at Northwestern University, has authored a meticulously detailed history of productivity, the standard of living and economic growth in the United States since the Civil War. His book, The Rise and Fall of American Growth, 762 data-filled pages in length, is interesting as well as informative. It earned a spot, in fact, on The New York Times bestseller list after publication and has evoked praise from most economists, even though many don’t agree with Gordon’s forecasts.
Gordon considers the 1870-1970 period as one characterized by major innovations affecting our standard of living, including electric lighting, home appliances, motor vehicles, air travel, air conditioning, television and, in the later years, computers. Within this period, the 1930s were very difficult years, the time of the Great Depression, but ones in which misguided monetary and fiscal policies apparently were more the culprits than a lack of innovation. The early 1940s which followed were years of death and deprivation from World War II, but a time in which both innovation and output per man-hour soared as the citizenry of the United States did everything possible to provide goods and services for the war effort while continuing to provide necessities for the civilian population. Surprisingly, these higher levels of productivity stayed with us following the war.
The author views the period since 1970, however, as one of gradually declining productivity except for some relatively short-lived upward blips, such as one which occurred in the interval between 1993 and 1998, when the stand-alone computer was linked to the rest of the world through the Internet. He notes that annual productivity grew by an annual average of 1.89% from 1920 to 1970, but by the more recent 2004-2014 period, the rate of growth had fallen to 0.40 %. More troubling is his conclusion that productivity growth will remain slow in the years ahead and overall growth of the economy even slower, in his words, “to a crawl.” He cites a number of headwinds to growth, including a lack of major innovations similar to those of the hundred years after 1870; increasing inequality of income; a decreasing impact from educational attainment; an aging population; and the rising debt of students and the federal government.
Although the data backing Gordon’s projections are impressive, many observers, particularly the techno-optimists of Silicon Valley, have felt that his projections are too pessimistic. We are in their camp. Even though computers and the Internet have been an important part of our life for quite a while, their impact and pervasiveness continue to grow rapidly. Witness a very efficient Amazon, as well as other Internet retailers, taking market share from traditional heavily-staffed stores, but now with only 7.5% of total retail volume. Marvel at the major medical advances facilitated by mainframes crunching vast amounts of data. See the many business efficiencies enabled by smartphones and tablets. Wait for many future productivity-enhancing applications of newer technologies such as small robots, drones, artificial intelligence, 3D printing, and driverless vehicles. And as always, be on the lookout for innovations not yet here, but sure to come, and in many cases, impossible to predict.
Rapid growth is not easy for large, long-established entities. Our economy is no exception. Some of the explosive growth of earlier years is not likely to be duplicated, except in shorter time segments, and in those periods, in response to dramatic new technological applications. Long term in the United States, if the past is any guide, we will probably show very respectable growth relative to the rest of the world, and with more positive surprises than disappointments. Near term, modest growth may well be more likely, and the challenge for us as investment managers will continue to be to find the best performing and reasonably priced companies in that environment for our clients. We will work hard at that task.