I’ve spent a lot of time this year on two threats: inflation and rising bond yields. With soaring energy prices and a pending Christmas crunch, everything can look terrifying. However, there are bullish cases where the 20-year decline in productivity is nearing its end.
The basic case is that the company is reinvesting, and an increase in fixed investment can lead to a rapid increase in productivity. The spending-cutting headwinds over the past two cycles have all but faded away after the dot-com companies overreact and the credit crunch after the 2008 financial crisis. In addition, the workforce is no longer cheap, wages are rising rapidly, and companies are reporting difficulty in employment, so companies have a strong incentive to invest.
Simply put, money is plentiful and workers are not plentiful, so investing in machinery makes sense.
Data on new orders for capital goods rose significantly as the recovery from Covid-19 took hold after a much smaller-than-normal decline during the recession, with the exception of volatile aircraft orders that fell last year. Growth. New orders, excluding aircraft and military spending (does not increase military productivity), reached record highs in June. Adjusting for inflation, it looks worse, but it is still higher than it was five years before the pandemic. S&P Global says the same pattern applies to much of the world and predicts that 2021 will see the biggest increase in global capital investment since 2007, the peak of the previous business cycle.
Ian Shepherdson, chief economist at Pantheon Macroeconomics, points out that US capital spending is well below previous trends in the last business cycle and companies need to catch up.
“Everyone was in shock and the real backlog accumulated in the last cycle, so much remains to be done,” he says. Companies need to buy new equipment and software as well as replace older vehicles, machines and computers in order to be more efficient. One small example: Driven by the health crisis, restaurants are increasingly accepting orders electronically.
If this is true, this bullish case allows for a rapid increase in wages without accelerating inflation, because the increase in wages is offset by an increase in productivity. If productivity increases from an average of 1% to 2% per year since 2010, wages could increase by 4% per year instead of 3%. Instead of worrying only about a more than 4% increase in salary, we were able to persuade them.
Federal Reserve Board Vice President Richard Clarida cited productivity gains as a reason he thinks inflation will be temporary last week, but the hypothetical figure he used is about 3.5 wages. % increased, productivity was 1.5%. Currently, both median and median wages are above 4%, so productivity needs to be raised to 2% per annum to contain inflation.
Further productivity gains could come from the Biden administration’s $1 trillion reduction in infrastructure investment and the European Commission’s €800 billion ($930 billion) investment program.
The International Monetary Fund hopes the changes forced by the pandemic will also help productivity, thanks to the proliferation of remote working, electronic payments and automation.
Unfortunately, it is not guaranteed. Firstly, the high capital investment cannot be sustained. Even during the recovery period from the financial crisis, capital investment increased and remained unsustainable. The situation is different. High unemployment at the time meant little wage pressure, but unlike today, weak banks restricted access to corporate credit. However, another major factor was the volatile economic recovery, which forced companies to re-evaluate their expansion plans. And there are still many threats to development.
Second, higher capital investments are already diluted by higher prices. New car prices in September were 10% higher than in September 2019, so companies planning upgrades will find that some of the productivity gains for new vans and trucks are being consumed at cost. Prize. In a broader sense, the pandemic ended a 25-year decline in the price of imported capital goods and scrapped vehicles. Prices may start falling again, but higher machine costs mean fewer productivity gains for businesses.
Third, high capital investment may not lead to high productivity. It sounds silly, but ultimately, too many fixed investments can create additional challenges, such as climate change, the withdrawal of supply chains from China, and companies’ increased resilience to crises. The problem will be solved. Fixed investment can guarantee that productivity will be higher than it would otherwise be, but not necessarily higher than in the previous decade.
Fourth, government spending may not be very useful. The US transportation infrastructure is in dire need of revision and there should certainly be some productivity increases. But $550 billion of new money over five years, which is 0.5% of GDP annually, is beneficial but not transformative.
In the end, it’s too optimistic to focus solely on the productivity benefits of a pandemic. Covid-19 also burned hospital staff, with millions suffering prolonged symptoms and trillions of hangovers, none of which helped.
Investors who buy Bullcase don’t have to worry more about inflation than others, avoiding bonds, big tech and high-quality equities, which have significantly improved overall productivity over the past decade. You need to buy cheap circulating stocks which are left behind in stagnation. Saand Ki Kahani is a good story, but for now it is just hope.
Write to James Mackintosh at [email protected]
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