Economic statistics don’t tell the market’s entire story
Some indicators might have become antiquatedNovember 5th, 2015
As I review the daily market news and read the economic comments from various sources, it occurs to me that the current measurements being used don’t really show the true strength of our total economy.
From the early 20th century through the latter part, our economy was driven by and based upon how the industrial sector was doing. That made sense as that’s primarily what we did—we made “stuff.” And we still do make stuff—a bunch of stuff, matter of fact.
A report from the United Nations, quoted by Dr. Mark Perry last month, stated that our industrial sector produced goods worth more than $2 trillion. That total was just about equal to the combined industrial production of the next six countries combined. So, contrary to what a lot of folks think, we’re still the big dog on the manufacturers block.
You may recall the phrase from the middle of the last century, “What’s good for General Motors is good for America.” For sure, that doesn’t apply anymore for many reasons. As Ken Fisher observed, “Manufacturing has no magical predictive powers. Its surges don’t necessarily precipitate booming growth, and its dips don’t always foretell broader declines.”
The key is that our economy has become much more focused upon, and driven by, the service side of things. As also noted by Ken Fisher, these services today comprise about 77 percent of our GDP output, with similar percentages in the other major developed countries.
Put another way, if our industrial sector created more than $2 trillion in goods—which, by definition, represents around 20 percent of our total output—the conclusion has to be that our entire economy is massive. And it is. For the record, that total is currently about $18 trillion.
Nonetheless, the majority of the economic reports that the market responds to are still very much industrial-oriented. For instance, these include durable goods orders, capacity utilization, construction spending, and so on. While important to be sure, I believe that the effect of those on the daily markets and investor attitudes is way overdone, relative to their real effect. I believe that the emphasis continues to be much more on the “what used to be” industrials as the main drivers of the overall economy and not so much on the “what drives us now” services sector.
Which sector fits where?
According to the U.S. Census Bureau, “industry” includes the manufacturing, mining, construction, electricity, water, and gas sectors. On the other hand, “services” covers just about everything else. Arts, entertainment, oilfield services, commercial aviation, truck transport, software development, financial services, and more.
There are a lot of ripple effects throughout the economy as a result of this sector emphasis. For instance, one is that the service sector typically tends to use relatively fewer natural resources and much more human resources than does the creation of industrial products.
Further, many of these service areas require much more training and education of their workers in order for them to be positive contributors. This affects unemployment because, as we see today, those lacking in the job skills, education, or training continue to have a tough time finding meaningfully paying jobs in the U.S.
Regarding employment generally, Steve Case, co-founder of AOL, said recently that, “The way we track jobs also needs to be updated to reflect the millions of people in the ‘gig economy’. I think there’s going to be a new class of worker that’s going to emerge in the next few years.”
This gig economy, also referred to as the sharing economy, is made up of workers who don’t fall into traditional full or part-time classifications … think Uber drivers, for instance. These types of workers choose to work fewer hours for multiple companies.
I don’t expect these changes to take place overnight. My point with this is that industrial-related things are easily measured and tabulated. Not so much with services. While the costs of components for an iPhone can be readily tracked, how do you track the use and effect of the apps that can be used with it, along with instant Internet access to share ideas, plans, and conclusions?
Let me re-emphasize that I’m not remotely suggesting you neither pay any attention to the entire scope of industrials nor that they have no effect on your investments. I am advocating a new, and perhaps broader, consideration be given to those areas that seem to me to offer significant potential for long-term growth.
In my opinion, and it’s hardly unique to me, I believe that, while others are and will be important, technology is the general hub around which major developments in our economy will take place. Not just tech, per se, but how it’s used in other sectors and by other companies as well. Let me share with you a couple current examples of sectors where this is already occurring.
Biotechnology is a major one. Not just the development of drugs unimagined even 10 years ago, but also artificial limbs that enable the user to move and function almost as well as they did previously. And how about artificial valves for hearts, designed specifically for that patient and created using a 3-D printer? This isn’t science fiction—it’s fact.
How about the search for energy? Using technology, the engineers can—from just one central site—drill in different directions, to different levels where their high-tech scanners have shown them recoverable product exists. This serves as both a tremendous cost savings as well as minimizing the effect of the drilling on the surface.
Consider this example in retail. A company that has really used tech to build itself is Amazon. To say that people use its services is a huge understatement. In a recent Re/code story, it was reported that more than four in 10 online customers go to Amazon first when searching for products. That was reflected when the company reported its third quarter earnings in late October, coming in with a nice profit, instead of the loss the experts had predicted for the period.
Its sales—just for the quarter—were more than $18 billion.
I call upon Mr. W. Buffett of Omaha for some advice to take to heart whenever you see your holdings—in whatever sector—not doing as well as you’d like. He says that, when it comes to investing, don’t think of it as buying a stock, think of it as buying a part of a business. He believes that successful investors look for “discrepancies between the value of a business and the price of small pieces (stock) of that business in the market.”
In the tech sector, there will often be wide discrepancies with price and value. As an investor, you need to know that the inherent value of the business you own is solid so that you’re not—by virtue of headlines or emotion—coerced into closing your positions prematurely.
One of the challenges with the tech sector in particular is that it often can be more volatile than others … witness the flips and flops in the biotech area this past summer, as an example. Then we had the correction as well, which seemed to bother a number of folks. I agree with Ben Carlson’s definition of a correction as “something everyone says is going to be healthy … until it happens. When it does, it somehow morphs into a disaster that will ‘never end.’”
In that light, let me also share some observations from Goldman Sachs’ fourth quarter report. It stated that, “The current economic recovery—despite running for more than six years—is holding steady. In fact, indicators ranging from housing to inflation to wages suggest the current expansion still has room to run. We believe a U.S. recession remains years away.”
Michael Maehl is an independent financial adviser and Spokane-based senior vice president of Opus 111 Group LLC, a Seattle-based financial services company. He can be reached at 509.747.3323 or email@example.com