About productivity

Productivity is an important concept. Unfortunately people yawn when one starts talking about productivity and therefore little is being said about it. But it is a concept which has a major impact on the dollar, profits, and the stock market.

Productivity measures the efficiency of the country. Its growth tells us if we are getting wealthier or not. Let me explain.

In my talks I give the example of a shoemaker. If he makes one pair of shoes in one day and sells them for $50, he makes $50 in one day. If, however, he finds machines that improve his work and he can now make two pairs of shoes, he can make $100 in one day. The shoemaker doubled his income by doubling his productivity measured in output per man hour.

If the shoemaker becomes lazy, however, and makes one pair of shoes in two days, his income per day is cut in half. Outcome: lower productivity results in lower income.

The point is that our income and overall wealth improve as we improve our productivity. If our productivity slows down, however, our wealth declines. This is the first major implication.

Personal wealth increases with our personal productivity - by getting educated, working hard, investing, and managing wisely personal finances. The low productivity people, unfortunately, become the disadvantaged among us.

The reason the productivity of the US is slowing to a crawl is due to the overwhelming number of low productivity people and industries in our country. Food stamps and other safety net programs help them survive. Not to become more productive. Only massive educational programs can help improve the status of the disadvantaged.

The problem with low productivity growth is that business cannot absorb costs. Labor costs per unit of output increase as productivity slows down. The reason Italy, Greece, Spain, Portugal are in deep financial trouble is because their productivity growth is dismal and therefore they have the highest labor costs in Europe, thus offering little or no profit opportunities to entrepreneurs.

Low productivity growth is typically associated with high trade deficits. People tend to buy products that offer value – low price and high quality – relative to the products made in the home country. It is no coincidence that our trade deficit is enormous. Why? There are few industries making products needed by the global markets. We want to buy “their” products, but they do not care about what “we” produce.

One major impact of low productivity. The country with low productivity has to sell its currency to buy the currency of the country producing the products we want. The outcome is a decline in the currency of the low productivity country and an appreciation of the currency of the higher productivity country.

Finally, low productivity forces the country to borrow to finance not only bloated governments and financial systems, but also the purchase of goods and services from other countries thus increasing its overall deficit.

Some observers say that the printing press of the Fed is causing the dollar to weaken. This is absolute nonsense. The reason they are printing money is because the Fed is trying to keep the economy going by compensating with money our lack of productivity. If our productivity growth were 3% - instead of zero percent – the economy would grow at a healthy 5%-6% pace and the Fed would not have to save us with a deluge of money.

The bottom line is that slow growth in productivity is a reliable harbinger of slow economic growth, reduces our wealth, raises labor costs, dampens profitability, weakens the dollar, increases our trade and overall deficits, and discourages foreign entrepreneurs to invest in our country.

More details in my The Peter Dag Portfolio , in Dag's Exclusive Market Alert, and my free educational videos on http://www.peterdag.com/.

George Dagnino, PhD
Editor, The Peter Dag Portfolio. Since 1977
2009 Market Timer of the Year by Timer Digest

To find out more about my in depth views of the markets and my strategy just visit our website https://www.peterdag.com/ where you can subscribe to The Peter Dag Portfolio. You can also call me at 1-800-833-2782 to discuss your specific investment portfolio.

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