U.S. economic growth is “pretty damn good.”
That’s what billionaire investor Warren Buffett said in an interview this week.
While he admitted GDP of less than 2% doesn’t match the quicker pace of decades past, he still believes the economy is just fine.
When it comes to productivity, he noted:
“If you don’t improve productivity, you don’t go anyplace. And fortunately, we have a system—we’re in the early innings of it, but we have a system where lots and lots and lots of people who are very smart are thinking about ways to both come up with new products, and to increase productivity and that’s the way we move ahead.”
“And America is wonderfully positioned for that.”
That’s great news if true. Unfortunately, real declines in productivity don’t support Buffett’s statement, nor do the other warning signs of economic disarray.
With stocks pushing into record territory, warnings for a substantial correction are gaining steam.
Goldman Sachs, for instance, just downgraded equities to “underweight”, noting that stocks are vulnerable to growth and policy news in coming months. Falling oil prices, weaker than expected GDP, political uncertainty, and slowing growth in China have been weighing on sentiment, too.
The news isn’t much better for the average American or for businesses.
Labor productivity, or the amount of goods and service produced for each hour of work, is no longer growing, as it has in the past – decreasing 0.5% in the second quarter as hours worked increased quicker than output, according to The Wall Street Journal.
That news marks the third quarter of falling productivity – the longest losing streak since 1979.
It would also explain why wage growth has been stagnant.
Since productivity is a key ingredient in determining wage growth and economic output, the weaker it is, the weaker the pay. The only good news is that it should keep the Federal Reserve from raising interest rates any time soon.
Business spending on new equipment fell 3.5% in the second quarter, and is now down about 2% over the last year.
According to The Wall Street Journal, business investment has fallen for the last three quarters, as new orders for non-defense capital goods declined.
That tells us companies do not see a great reason to expand at the moment. They lack confidence in steady, sustainable growth. It’s no wonder U.S. productivity has slipped.
Unless productivity improves, economic and wage growth will be slower than estimated.
More worrisome, the Bureau of Labor Statistics (BLS) just reported that thanks to a “4.7-percentage point downward revision to first-quarter hourly compensation, unit labor costs decreased 0.2 %in the first quarter of 2016, rather than increasing 4.5%as reported June 7.”
Compensation fell another 1.4% in the second quarter.
You won’t read about that in the mainstream press, though. The BLS did a good job of burying this news in a press release.
The only good news is that, with such economic developments, the Fed is likely to delay interest rate hikes this year, which means markets could move aggressively higher.
While volatility and slower growth are likely to continue, we will search for stocks at bargain prices. Look for more information on how to invest well in the next issue of The Cheap Investor later this month.