	Generational Dynamics
	Forecasting America's Destiny ... and the World's

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Generational Dynamics Web Log for 5-Feb-06
Worker productivity plummets as corporations do more hiring

Web Log - February, 2006

Worker productivity plummets as corporations do more hiring

After four years of boosting earnings by not hiring, companies did enough hiring in December to unexpectedly lower the unemployment rate to 4.7% from 4.9%, the lowest it's been since 2001.

This explains another surprise this week: Worker productivity plummeted and labor costs jumped in the last quarter of 2005. These results also exceeded analysts' expectations.

There's a great deal of irony in this situation for departing Fed Chairman Alan Greenspan based his entire strategy for handling the 1990s stock market bubble on worker productivity, according to a November, 2004, article in the Wall Street Journal.

Greenspan noticed in 1996 that a stock market bubble was beginning, but decided to ignore it, because he believed that it was occurring because of increased worker productivity stemming from information technology (IT - the use of computers). As I wrote, anyone familiar with the computer industry at that time would have known that Greenspan was simply wrong. Companies were spending astronomical sums of money on software development costs to bring up web sites, and any tiny amount of money saved would have been swamped by these huge development costs.

So Greenspan was wrong about worker productivity in 1996, and made a historic decision at the time not to try to stop the bubble, but instead to "deal with its aftereffects." What that meant was seen after the Nasdaq crash in 2000: The Fed lowered interest rates to near zero.

But something else happened at exactly the same time: During mid-2000, employment of IT professionals dropped to almost zero. Uniformly, businesses decided to do little or no more computer software development or web site development, and make do with what they already had. (As an IT consultant, I was personally affected by this, and was mostly unemployed for a couple of years. The "good" news is that this period of unemployment gave me plenty of time to develop Generational Dynamics and this web site.)

When businesses stopped hiring IT professionals, the thing that Greenspan thought was happening in 1996 actually started happening in 2002. Businesses did little software or web development, and the little that they did was performed by seasoned employees that had been hired years earlier. As a result, worker productivity really did increase, and has been very high since 2002.

With worker productivity high, corporate earnings were also high. High earnings meant that price/earnings ratios would be lower for a given price.

So worker productivity combined with low interest rates to continue the stock market bubble that began in the late 1990s. The low interest rates made plenty of money available for purchases of stock on credit, and the extremely high earnings growth justified high prices, under the assumption that earnings would continue to grow at those historically high rates.

Note the last clause of the previous paragraph: Investors have been assuming that earnings would continue grow at the same historically high rate. As we explained in detail last month, this cannot happen. In fact, by the principle of "mean reversion," earnings are going to fall substantially, to historically low levels, for several years, in order to compensate for the years of historically high earnings. This will trigger a stock market crash similar to the one that began in 1929.

It's impossible to predict when a stock market panic will occur -- it might be next week, next month or next year -- but mathematically speaking it has to happen, and sooner rather than later. All we can do in these articles is point out that stocks are currently overpriced by a factor of some 220%, and that the time is increasingly right for a panic to occur.

Ironically, the increase in hiring and the lowering of the unemployment rate during a bubble is one of the signs. It means that corporations are risking earnings by betting that the bubble will continue indefinitely.

As I've been saying since 2002, Generational Dynamics predicts that America is entering a new 1930s style Great Depression, with a stock market crash to the Dow 3000-4000 range, probably by the 2007 time frame. I have no reason to change this prediction now, especially with public debt and the trade deficit continuing to grow uncontrollably and exponentially. (5-Feb-06) Permanent Link
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Generational Dynamics Web Log for 5-Feb-06 Worker productivity plummets as corporations do more hiring

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Generational Dynamics Web Log for 5-Feb-06
Worker productivity plummets as corporations do more hiring