Hi Dwight,
Here for some good old fashion debate
Victor
Editor's Letter: It Can't Get Any Better?
Maybe It Can
By Dave Kansas
Editor-in-Chief
5/8/98 8:05 PM ET
How the bubble economy advocates must be fuming today.
Sharply lower unemployment, decent wage gains ... and the
stock market just couldn't get enough of the news. Stocks
headed higher, led by the technology stocks, including
bellwethers Microsoft and Intel. It was, to say the least, an
intriguing session.
In the morning, following the jobs report, you could almost
hear the stares around the trading rooms as folks tried to
figure this one out. The Nairu (the non-accelerating inflation
rate of unemployment) believers would have to be screaming
that roaring inflation is right around the corner with the
monthly unemployment rate at an absurdly low 4.3%. To top
it off, wage gains showed some oomph. But, at the end of
the day, that once-deadly combination contributed to higher
stock prices and only a modest drop in the bond market.
What is the stock market telling us? The stock market, with
all its collective might, is doing its best to make the New Era
argument. Investors believe that the massive impact of new
technology has altered the pricing and productivity
environment in ways that we as yet can't fully comprehend.
Internet commerce is slashing costs, new computing power
is improving productivity and corporations, faced with this
tough environment, are still wringing profits from the system.
I recall Jack Welch, head of General Electric, giving an
interview earlier this year on CNBC. When he would give his
marching orders to his staff, he started with one bedrock
assumption: no pricing power (i.e., an inability to contribute
to inflation). Still, even with that presumption, Welch said he
expected to continue knocking down strong profit gains. GE
has done exactly that, and it is not alone.
Mighty corporations like GE have no pricing power, and that
underscores how tough it is for inflation to take root in this
environment. The New Era argument is that the U.S. is in a
steady, slow, noninflationary growth phase. In such a world,
stocks accrue higher valuations since earnings growth
continues deeper into the future. The cyclical trough is not
discernible. Certainly valuations are not cheap, and the
stock market is reflecting confidence well into the future. But
there is that confidence in the future production of earnings.
In order for that to continue, companies will require still
greater productivity gains.
Productivity is the great linchpin of the New Era, and that is
part of the dark side to all of this thinking. If the New Era
unravels, it will not come from increased inflation. No,
instead it will come from the inevitable squeeze on
profitability. If corporations are unable to find anyone to hire,
save at exorbitant costs, then profits will squeeze. It's
already crystal clear that these companies can't pass on
price increases to support these higher wages. Therefore,
with unemployment at such a low level, the true test of the
New Era ideal is ahead of us. Either productivity keeps
improving, or profits start to skimp along. That debate will
make for an interesting year ahead of us.
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