The Third Productivity Revolution
Very few people predicted how this market was going to shape up. A year ago the argument was between a hard and a soft landing with most pundits falling into the ranks of the hard. They were all wrong and I’ll tell you why.
But first a little background. When COVID hit, the government expanded the money supply by 40%, jacked up inflation, and added $10 trillion to the national debt.
In response to the inevitable surge of inflation, the government again (this time in the form of the Federal Reserve), pointed to the 9% inflation rate and ramped up the Fed Funds Rate from 0.8% to 5.33% in just 18 months in an attempt to cut soaring prices to 2% annual growth.
Historically such a surge in the cost of credit would kill off the housing market, slow the economy, and send the unemployment rate sky-high.
This didn’t happen.
Real Estate prices, minus downtown office buildings, went up as supply remained tight. It is a good bet that when rates start to drop at the end of the year and mortgage rates fall from around 7% today to 5.5%, housing prices will boom on pent-up demand. Mortgage lenders will make a killing.
Secondly, the economy is expanding. The U.S. economy grew by 3.2% in the fourth quarter, which is nice solid growth. Not only that, but the U.S. GDP has expanded for the past six quarters. There is no soft, or hard, landing in sight.
One would have to go back to the first two quarters of 2022 to find two quarters of negative GDP – a situation that we used to call a recession.
As far as unemployment goes, everybody got a raise. The average person got a 5% raise and those that moved to other jobs got a 7.2% raise. Employers added 353,000 jobs last month and the unemployment rate was at 3.7% – which is fantastic considering there are more than 7 million new illegal immigrants in the country.
There is only one thing that can explain this type of growth in the face of serious monetary headwinds: rapid productivity growth based on new technology.
This type of phenomenon has happened twice in my lifetime. Once in the 1980s when the PC replaced giant rooms full of secretaries, and accountants. And again in the 1990s when the internet changed business as we knew it.
It is too soon to tell for sure, but we could be undergoing a Third Productivity Revolution in the last 40 years. It is AI, of course.
Forbes writes:
“Companies are already implementing “lights out manufacturing,” where robots do it all and humans are only overseers. If you’re in software, you will be able to cut your engineering workforce by 80%, but you’ll also have to hire systems designers with a very different skill set. Ditto TV and movies, which will deploy digital actors indistinguishable from carbon-based people. Goodbye, armies of make-up artists. Hello, more graphics designers.”
Could it be that AI is already making a difference? The BLS says that productivity increased but that it has more to do with workers working fewer hours, making less money, and output rising marginally (undocumented workers perhaps?).
Not that the BLS would have the tools in place to measure AI’s influence anyway and probably won’t for ten years.
It could be that the economy might have more to do with the millennials entering their most productive working and family formation years. Demographics are destiny as they say.
Either way, this economy and the companies that drive it are doing well. The stock market continues to hit new highs which is bullish. Stocks that hit new highs tend to continue to make new highs. The trend is your friend.
In other words, you don’t want to miss out on this bull market. It may be bigger than you can imagine. Heck, just think of the boom when the Fed does start cutting rates.
All the best,
Christian DeHaemer
Outsider Club
