The Good News the Economy Has Been Waiting For
The release of the productivity report from the Bureau of Labor statistics confirms that the natural recessionary processes are proceeding predictably.
While most people have a fuzzy idea of just what a recession is, and an even fuzzier idea of a recovery, there is a defined process that takes place and this report confirms the trough is near.
The entire engine of economic growth is corporate profit.
Profitability is the key initiator and arbiter of the contractive forces.
Funding costs and availability are the deciding factors on economic efficiency.
During periods of economic expansion funding costs decline and availability increases, enough so that inefficient and unsustainable projects are undertaken.
As a direct result, business profitability begins to decline.
When profit growth slows enough, corporations begin to scale back activity and the unsustainable projects begin to fall apart.
When a critical mass of dislocation is achieved output begins to fall significantly in a nearly self-sustaining cycle.
In the current contraction, profitability slowed in late 2006 beginning with housing-related activity.
It was the housing boom that produced the inefficiency and unsustainability.
The credit crisis is a symptom of the larger economic dislocation of profitability.
Once the housing boom reversed, economic activity connected to it had to contract to a sustainable natural equilibrium, and in the process affected all sectors of the economy (particularly finance and construction).
As a response to falling output corporations, in particular, respond by first reducing the growth of employment.
By early 2007 employment growth had slowed markedly.
As the jobs market slowed, so did consumer spending growth and a host of other economic activity.
Once overall output begins to fall, as it did in December 2007, corporate profits reverse and companies begin to actually lose money.
Without being able to improve revenue, corporations are forced to cut costs - the biggest cost being labor.
In addition to labor cuts, businesses will postpone spending on capital projects (individuals will postpone spending on discretionary items).
At some point during the contraction the cost cutting will occur at a rate faster than output declines.
And that is what the productivity report is finally telling us.
Business productivity in the first quarter improved significantly because businesses are cutting costs faster than revenue, or output, is declining.
That will mean profitability ahead.
Recognition of future profitability slows the pace of labor cuts (as the latest labor market reports are confirming).
It also affords some businesses to resume postponed spending, just as the bottoming of the labor market allows individuals to do the same.
The result is the beginning of a recovery.
A significant portion of any economic contraction is that postponement of spending.
Most investors have been concerned about the banking system's role in this recession for the wrong reasons.
The lack of credit because of the banking crisis has increased the degree and significance of postponed spending beyond what the past few recessions had experienced, making this contraction much more severe.
But the silver lining in that severity is that spending may return at a rate much faster than most "economists" and "experts" anticipate.
For all the talk of stimulating demand, the only way to truly accomplish that goal is through corporate profitability (assuming efficiency and sustainability), which in turn, solidifies the employment market enough to encourage spending by individuals (even though unemployment will continue to rise slowly through the recovery).
In the final analysis, the only way to get people to spend more money is by giving them a better-than-temporary job.
Now we have to hope the crushing government debt will not force interest rates too high too fast as investors rebuild their appetites for risk, and that the accounting geniuses don't force another banking crisis with FAS 140.
While most people have a fuzzy idea of just what a recession is, and an even fuzzier idea of a recovery, there is a defined process that takes place and this report confirms the trough is near.
The entire engine of economic growth is corporate profit.
Profitability is the key initiator and arbiter of the contractive forces.
Funding costs and availability are the deciding factors on economic efficiency.
During periods of economic expansion funding costs decline and availability increases, enough so that inefficient and unsustainable projects are undertaken.
As a direct result, business profitability begins to decline.
When profit growth slows enough, corporations begin to scale back activity and the unsustainable projects begin to fall apart.
When a critical mass of dislocation is achieved output begins to fall significantly in a nearly self-sustaining cycle.
In the current contraction, profitability slowed in late 2006 beginning with housing-related activity.
It was the housing boom that produced the inefficiency and unsustainability.
The credit crisis is a symptom of the larger economic dislocation of profitability.
Once the housing boom reversed, economic activity connected to it had to contract to a sustainable natural equilibrium, and in the process affected all sectors of the economy (particularly finance and construction).
As a response to falling output corporations, in particular, respond by first reducing the growth of employment.
By early 2007 employment growth had slowed markedly.
As the jobs market slowed, so did consumer spending growth and a host of other economic activity.
Once overall output begins to fall, as it did in December 2007, corporate profits reverse and companies begin to actually lose money.
Without being able to improve revenue, corporations are forced to cut costs - the biggest cost being labor.
In addition to labor cuts, businesses will postpone spending on capital projects (individuals will postpone spending on discretionary items).
At some point during the contraction the cost cutting will occur at a rate faster than output declines.
And that is what the productivity report is finally telling us.
Business productivity in the first quarter improved significantly because businesses are cutting costs faster than revenue, or output, is declining.
That will mean profitability ahead.
Recognition of future profitability slows the pace of labor cuts (as the latest labor market reports are confirming).
It also affords some businesses to resume postponed spending, just as the bottoming of the labor market allows individuals to do the same.
The result is the beginning of a recovery.
A significant portion of any economic contraction is that postponement of spending.
Most investors have been concerned about the banking system's role in this recession for the wrong reasons.
The lack of credit because of the banking crisis has increased the degree and significance of postponed spending beyond what the past few recessions had experienced, making this contraction much more severe.
But the silver lining in that severity is that spending may return at a rate much faster than most "economists" and "experts" anticipate.
For all the talk of stimulating demand, the only way to truly accomplish that goal is through corporate profitability (assuming efficiency and sustainability), which in turn, solidifies the employment market enough to encourage spending by individuals (even though unemployment will continue to rise slowly through the recovery).
In the final analysis, the only way to get people to spend more money is by giving them a better-than-temporary job.
Now we have to hope the crushing government debt will not force interest rates too high too fast as investors rebuild their appetites for risk, and that the accounting geniuses don't force another banking crisis with FAS 140.
Source...