Maxed out?

By David Berman
Globe Investor Magazine,
September 18, 2008
Photograph Courtesy Nicholas Metivier Gallery, Toronto

Investors might remember the 1990s as the years of the dot-com boom, which led to outrageous gains in the stock market. But they were also the years when productivity in the United States, and in much of the developed world, went through a dramatic shift that got many observers wondering if the economy had entered a productivity revolution. In many ways, it had. When productivity is rising, the same amount of labour produces more cars, more food, more accounting, more everything. Between 1973 and 1995, U.S. productivity growth trudged along at a mediocre clip and then, pow, it doubled in the late 1990s.

The reason? Downsizing work forces in the 1980s created leaner companies, a deregulated economy meant less red tape and the rise of globalization encouraged innovation. But economists believe that most of the growth came from advances in information technology as cheaper, better computers allowed us to do more. For example, ATMs replaced tellers.

Productivity growth slowed dramatically with the bursting of the dot-com bubble and subsequent recession, because companies tend to invest less in technology during slowdowns. Some observers wonder if those '90s-style gains will ever reappear, thanks to the fact that much of the developed world is hobbled by a greying work force. Baby boomers are set to leave the work force in big numbers, and when the bulk of a country's population is sitting idle, productivity slows.

Still, optimists are sure that an upsurge is on the way. Alan Greenspan, in his book The Age of Turbulence, noted that although there is no evidence right now of a rebound in productivity growth, "history tells us that such a turn will take place. It always has." Even if he's wrong, there are still ways to invest in surging productivity, because it can pop up in isolated industries. Duncan Stewart, head of Duncan Stewart Asset Management, notes that the productivity theme is already at work in agriculture stocks, such as Potash Corp. of Saskatchewan and Monsanto Co., since investors are betting that farmland will have to yield more food in the future with help from, say, fertilizer. "There isn't that much new land to plant," he says. "That sort of intensification of agriculture is a bet on productivity."

The other way to bet on productivity is to invest in technology stocks such as IBM, ADP Inc. and Applied Materials. They might not produce tomorrow's robots, but they are sitting in the right place should companies recognize they need to modernize after years of what BCA Research calls a "chronic underinvestment in technology" following the 1990s tech bust. These stocks sizzled during the previous productivity boom, and they could do so again.