Thursday, June 02, 2005

Safe Haven | The China Productivity Miracle

Safe Haven The China Productivity Miracle

Folks who say it is a conundrum that long-term interest rates are low are not looking at the data staring them in the face (or they are jawboning a slow down). When I decided to write about this "conundrum" it took about 10 seconds to find this excellent article written in 2004 by John Maudlin. John is the author of Bulls-eye Investing.

The data reported show that the most populous nation in the world grew its productivity at the unprecedented rate of 17% annually from 1995 to 2002! During this time, China lost 15 million manufacturing jobs! China has more people unemployed than the US has employed! The incredible growth has caused a world wide increase in goods produced and available at lower costs. Folks, 17% productivity is a big deal. A 2% rate used to be a blessing!

The China miracle was repeated to a lesser degree all around the world. After all, we do live in a global economy--each nation competes with all others to some degree. The countries who have avoided the siren's songs of protectionism have benefited from the lower costs of goods. In the US, the number of production workers peaked in 1979. Over the next 25 years, real manufacturing in the US increased by 77% while the number of workers in manufacturing declined by 22%. Real farm output increased an astonishing 96% while the number of farm workers declined 31%. As a nation, we have prospered!

At the start of each economic recovery, politicians and news media whiners have fussed about the jobless recovery. They probably know better but they figure the average American is too dumb to appreciate that making more goods with fewer workers is a good thing. As a nation, we have been able to afford, for example, to spend a relatively high percentage of our GNP on research. More and more Americans are paid to help find treatments for cancer, heart disease and other illnesses. More are engaged in teaching, writing and charitable pursuits. Our country has churned out patents and copyrights on every thing from cell phones to rap music and received trillions in royalties from around the world.

In the US, the index of labor costs was 110 in 1994 and 95 in 2005. This is a good thing. Consumers often perceive that inflation is high. It is easy. perhaps even entertaining to complain about prices at the gas pump or grocery store. We know we can buy ten times the computer for 15% of the old price but we enjoy telling about how gas used to be 25 cents per gallon; but, even gasoline is cheap. When gas was 25 cents, I made 25 cents per hour priming tobacco. Top hands made 50 cents per hour and the average manufacturing wage was about $1.25. Now-a-days, Americans buy three to twenty times as much gas per hour of work. My brother likes to tell that when he sold new houses for $27,000 that a new pick-up truck cost $2,700 and when he sold new houses for $350,000, a new truck cost $35,000. However, the truck he bought for $2,700 was not nearly the truck he bought for $35,000. In those days, a $2,700 truck was shot by the time it had 80,000 miles on it. Today, he will put 200,000 miles on before the truck is broken in good. The old truck didn't have air conditioning, roll up windows or a good sound system. Also, he now builds more $600,000.00 plus homes than the occasional $60,000 home in those days.

The US continues to enjoy unusually high rates of productivity. In the mid 90's the growth rate dropped below trend at least a time or two, but not today; our economy keeps doing more with less. The local news report last night was that the new Dell computer plant will be their most productive ever. Of course it has to be for Dell to be able to open this plant in America. Robots will be present in the plant but at its peak the plant will create 2,500 new manufacturing jobs. Even in the first year, with only 700 workers, the plant will turn out 700 computers per hour. This is the miracle of modern manufacturing. Can you imagine one person trying to build a computer in less than one hour?

Where is the conundrum? The world is making more goods at lower costs. The result is the lowest inflation rates in 80 years. Savers do not need to earn high interest rates when inflation rates are low. Therefore the market is bidding down bond rates. Low interest rates make capital expenditures for business and consumers cheap. Businesses are cautiously making capital investments which are increasing productivity all the more; pushing down inflation rates all the more. Consumers are taking advantage of the low rates to purchase larger homes and second homes.

Those who make a lot of noise about the housing boom are missing the fact that a majority of Americans can now afford two or more homes. They can afford to take time off to visit the beach. This is wonderful or wasteful depending on your point of view. When my Dad bought the second car for our family, our neighbors gossiped for months. You would have thought we won the lottery (some thought he must be a gambler). If Mrs. Thornburg were alive today, she would think it "down right sinful" to own two houses. Families with 3 or 4 cars would have clearly lost their minds.

Like the old country farmer said, "Times is good!"


By the way, construction spending has slowed in recent months, just like it did in 1995 as the market was taking off back then. The words of worry by the Fed, copied by the news talking heads, have served to moderate the housing boom. Enough people are at least concerned about the boom to think twice before buying the big house or the beach house. Now that the FOMC has engineered a slow down and is able to take its foot off the short-term interest "brake", the markets are ready to resume the advance.
I just read in the Economist Magazine that OECD economies are now projected to grow at a 1.2% rate this year. German Bunds rates are dropping to the floor. It should be no surprise that pressure is off rate increases in America. Our dollar will appreciate without further FOMC increases. The world market is in effect doing a lot of the heavy lifting for the FOMC.
Based on the numbers and the comments by Fed member Fisher, the FOMC may increase rates one more quarter percent. At the next hearing, Greenspan may be reveal a plan for stable rates for the foreseeable future.