...if anyone is interested.
Following my usual practice, I regret to inform you that I've reduced my investments in domestic equities. I think this play still has another unhappy act to run before the (perhaps) happy ending. But is there an intermission?
Over the next week, as I clean up my desk, I'm going to be doing short reviews of books that I have been meaning to write about. Let's start with Profit Power Economics, a fascinating new book which combines corporate strategy and economics. The author, Mia de Kuijper, runs her own strategy advisory firm and has a PhD in Economics from Harvard (she stopped by one day, and we had a fun conversation).
The book examines the strategic implications of what de Kuijper calls "The Transparent Economy." How do companies make money in a world of perfect information, where everyone knows what everyone else is doing, and where competition is absolutely intense? She argues:
Profit power is economic clout--the ability of a company to hold on to the value it itself has created, as well as to extract a share of profits from its competitors, to create incremental value for itself and for its partners in business relationships, and to shape the risks it and others will take on....Being "the best" does not guarantee that your company can hold on to its hard-earned gains. Only profit power does that.
These are not the perfect information markets we learned about in introductory economics, where everyone makes the same profits. You have to have some edge (which she calls "power nodes") to ensure that you are not squeezed out by the competition.
The link between this book and the "The Big Shift" of the previous post should be clear. Hagel and company are concerned that American companies, on average, are losing ground because of intense competition, with some companies doing much better than others. de Kuijper is concerned with how to make sure your company is in the winning camp. (Her reasoning applies to careers as well)
Profit Power Economics is a very stimulating read, whether you are a business manager or someone trying to figure out the best career path. The book is a bit dense in parts, but well worth the trouble.
In recent months, I've repeatedly made the point that the financial crisis was a symptom, not a cause. Innovation was weaker than expected, private sector job growth outside of healthcare was virtually nonexistent, while real wages and real stock values showed little gains from the late 1990s to the end of 2007, when the recession supposedly started. Most distressingly, stock prices for the nation's innovative sectors, biotech/pharma and information technology, showed a sharp plunge in real terms from 1998 to 2007.
Now there's a new report out today from Deloitte's Center for the Edge which provides additional confirmation that the underlying problems extended well beyond the financial sector, and started well before the housing bubble.
Back in June, the Center--led by John Hagel III, John Seely Brown, and Lang Davison--released a report showing that U.S. corporate return on assets has fallen by 75% since 1965. They suggested this decline in corporate performance was driven by the "Big Shift"--a tremendous increase in competitive pressure, combined with the increasingly pervasive digital infrastructure.
At the time, I told Hagel that I didn't want to write about his "Big Shift" until I saw industry data, so I could understand which industries were driving the corporate performance decline. Well, the new report from the Center takes a closer look at nine industries, out of which seven show the same pattern of deteriorating corporate performance.
For example, here's the ROA chart for the tech sector.
As the report says:
And what about innovation? At least as conventionally defined and practiced, innovation may not help the trend. The Technology industry, known for innovation, experienced one of the steepest ROA declines of all the industries we studied. This suggests that while product and technology innovation may be necessary, they also are not sufficient.
There are two industries where corporate performance is still strong, according to Hagel & Co: Aerospace & Defense and Health Care. The report notes:
We do not believe it is an accident that two of the most highly regulated industries in the U.S.—Aerospace & Defense and Health Care—are outliers in a broader trend of performance erosion. The ever-more-powerful digital infrastructure increases the potential for competitive intensity and performance pressures, but public policy shapes the degree to which specific industries feel that pressure
I still have to chew through the report some more. But it's pretty interesting.
This morning's productivity numbers showed a huge gain in output per hour in the third quarter--up at an annual rate of 9.5% in the nonfarm business sector.
But here's something else. If we are to believe these numbers, the biggest financial crisis since the Great Depression has actually produced a productivity gain of 5.1% since the downturn started in the fourth quarter of 2007.
If you think that productivity has risen by 5.1% during the financial crisis, I've got a subprime bond to sell you.
Let me get this straight. We have a collapse of the housing and construction sector, massive layoffs in almost every part of the economy, a sharp downturn in consumer spending, and bank failures on an astonishing scale---and the numbers show an increase in productivity?
It defies common sense.
I suggest two reasons why the numbers are off. First, as in my recent cover, companies are cutting educated workers such as scientists and engineers who are not directly involved in the immediate production process. This means a drop in important but unmeasured intangible investments in R&D, product development, training, and advertising, which are not getting picked up by the GDP statistics.
Second, and this is relevant to the DC conference mentioned in the previous post, the statistics are being greatly distorted by globalization. Let's take a look at the computer purchases and supply, as reported by BEA.
According to the BEA's number, final sales of U.S.-produced computers has *risen* by 3.9% since 07IV, while imports of computers have *fallen* by 1.5%. Over the same stretch, employment in the computer industry has fallen by 12.5%. Being incredibly simple-minded, that would suggest that productivity in the U.S. computer industry has risen by about 19% in the downturn. Not bad, if true!
But there's a problem. According to the BEA's stats, the price of imported computers has fallen by 9.6% since the end of 2007, while the price of computers to consumers has fallen by 22.2%.
That doesn't make sense. It's far more likely, as I argued here, that the import price stats are mismeasured.
If we assume that import computer prices really fell at the same rate as domestic consumption, that would mean import growth is really faster, and domestic output growth is slower, as is productivity growth. By my back of the envelope calculation, the effect on computer industry productivity growth is potentially huge (I'll give the details later after I have had a chance to check them). This sort of calculation extends to the rest of the economy, though less dramatically.
So for these two reasons, I am quite skeptical of the proposition that the financial crisis has increased output per hour.
I'm about to go down to DC to attend this conference (I'm giving the after-dinner remarks as well)
Measurement Issues Arising from the Growth of Globalization
This is a very important conference as we try to figure what is *really* going on in the U.S. economy. I'll be writing more about it.
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