“We’ve got a fully employed economy, rising real wages. We restarted the corporate earnings cycle. We’ve got strong confidence among businesses and consumers. The kick is we can do all of this without aggravating inflation and interest rates. If that’s going to continue, I think the bull market could continue forever.”
– Jim Paulsen, Chief Investment Strategist for The Leuthold Group
In last month’s article, we focused on “Knowing a Good Time to Invest” as one of the great qualities to adopt for anyone who wants to become a great investor. This month we focus on a similar, but slightly different quality…Great Investors Understand Progress
The Miracle of American Productivity
We at Concentus are subscribers to an insightful monthly newsletter written by industry expert Nick Murray. In his most recent edition, Nick shared some little known statistics about the American economy which we found astounding:
- Over the last 20 years since 1997, Real Manufacturing Output (adjusted for inflation) has risen by 40%, or $544 billion, while the number of Americans working in manufacturing jobs has declined by 29%, or 5.1 million. The United States is currently producing 40% more factory output than we did 20 years ago, but we are doing it with 5 million fewer workers.
- This trend is part of a larger story of an incredible boom in the productivity of the American worker, driven by technological innovation. Real Gross Domestic Product per capita (inflation adjusted) was $33,368 just 20 years ago, and today it is in excess of $52,000, an increase of roughly 55%.
- In America today, we are on track for a new record high in manufacturing output in 2017 ($1.92 trillion), and we are producing that output with about the same number of manufacturing workers as we had in the 1940’s.
- Manufacturing is only part of the story, as global GDP in general is booming. According to the OECD Global Economic Outlook published on June 7th, global GDP growth has picked up to a red-hot annualized rate of 3.25% since the middle of 2016.
The American economy continues to prove that it is the most productive and innovative economy the world has ever known, and that the increases in American productivity are nothing short of a miracle.
Too bad nobody knows this.
As we have written in the past, it is much more fashionable and “smart” to be pessimistic, and to point out the problems faced by our nation, than it is to report on our progress. The media, as well as much of the political establishment, seem much more ready to bombard us with the news that our manufacturing economy is in decay, and that we are permanently stuck in a “slow growth” economic funk in America. As a result, most Americans believe in a fictional narrative that our economy is in trouble, and that the ghost of 2008 still looms over us.
As evidence for this, Mr. Murray cites a recent study from the Pew Research Center which found that most Americans are fully aware of the “bad news” about our manufacturing economy – 4 out of 5 adults surveyed knew that manufacturing jobs have declined over the last 20 years. However, the “good news” is much less widespread – only 35% of adult Americans surveyed knew that manufacturing output has increased at all in the last 20 years, while 47% said they thought it had declined, and 17% thought it has stayed the same.
The Invisible Growth Story
These numbers tell the story that the productivity and output of the American economy has been booming for the last 20 years, but these numbers don’t even tell half of the story. There is an invisible element of our growth and progress that is even more amazing, and which implies that our economy is even more of a miracle.
There is a term in economics known as “Hedonic Quality Adjustment” – no, we are not talking about an all-inclusive swingers resort in the Caribbean. Economists have always had a difficult time calculating statistics like Gross Domestic Product, and the Consumer Price Index, because consumer preferences change over time, as new goods are introduced, while others are discarded from household consumption. Often these new goods are preferred by consumers because they have higher quality, lower price, or both. For example, not many digital cameras have been sold since the introduction of the iPhone, because it is a cheaper and more convenient way to take higher quality photos.
As an example of this phenomenon, I can remember being very excited to purchase the latest “big screen” television when I was a senior in college in 1990. The TV cost me $1,200, and was a huge “box shaped” monitor, which weighed roughly 150 pounds, and had an analog viewing screen which was 31 inches. Today, you can shop over the internet for a flat screen, 55 inch high definition monitor with an incredibly lifelike picture, and which is so light you can hang on your wall – all for about $600. Based on my college purchase, the “cost per inch” of television viewing has dropped from roughly $38.70 per inch to about $10.90 per inch, a decline of over 70%. However, this decline in price has also been accompanied by a massive increase in the quality of the viewing experience.
When calculating our economic output, it may appear as though television sales have declined, as prices have deflated, instead of inflating over time as we might normally expect. On the surface, this reduction in overall TV sales has influenced overall economic output in a negative way. However, the real story is an enormous windfall for American consumers, who can now purchase a far superior television for a much lower price! The “invisible growth story” in the American economy is that our innovation and technological advancements are providing the simultaneous benefits of much higher quality products for consumers, produced at much lower prices than ever before. This phenomenon vastly understates any evaluation of our nation’s economic output and Gross Domestic Product.
The $12 Million iPhone
Bret Swanson posted an article on the American Enterprise Institute website recently which beautifully articulates the impact of innovation and quality improvements as an “Invisible” element of the American Productivity Miracle.
In The $12 million iPhone, Mr. Swanson attempts to price the individual components of an i-phone purchased in 2016, at the cost of those components back in 1991. His analysis concludes that, back in 1991 it would have cost over $12 million to build the same iPhone which was available in 2016 for about $700. The kicker is that this price tag doesn’t include key features of today’s iPhone such as the camera, display, Random Access Memory, MEMS gyroscope and accelerometer, because those items were either not available back in 1991, or of such lower quality as to not even make a fair comparison to today’s versions. Of course, his estimate also does not include the impact of inflation, which should have made the cost to build an iPhone today well over $12 million, while instead the cost has massively deflated.
It makes us wonder…what would be the calculation of global GDP if every iPhone sold in the world this year had a price tag of $12 million?
We have written many times in these pages that we believe that the #1 quality all great investors share is a healthy sense of “Rational Optimism”, and that it is impossible to make a great investor out of a pessimist. In our view, it is impossible to be anything but optimistic when we are presented with the actual facts of history, and the relentless advancement of mankind.
A glance at the financial news today reveals that many professional investors, pundits and other “experts” are quite skeptical, and left scratching their heads over why the stock market continues to march relentlessly upward. After all, how can the market keep climbing despite destructive hurricanes, North Korean missile tests, and Donald Trump’s latest tweet?
The truth is that none of those things really matter to the stock market over the long haul. The stock market is doing what it always does – reflecting the fact that the American productivity miracle is on full display in today’s economy.
Having a Plan
The very best investors have a disciplined approach to making portfolio decisions, and always stick to their plan, no matter what the rest of the world is doing. They are optimistic and focused on the long term growth of capital that can arise from investing in an innovative and productive economy. They don’t let their emotional reactions to news headlines throw them off track, and they understand that a well-designed written investment and financial plan will result in long term success.
No predictions. No witch doctor investment sorcery or magic investing formulas. No “Black Boxes”. Just intelligent planning, patience and discipline.