Finding a silver lining in today's economy - Guest Column - U.S. Commerce Department reports productivity is increasng 2.5% to 3%

DSN Retailing Today, August 12, 2002 by Bob Verdisco

Unless you've been living in a cave for the past couple of years, you're painfully aware that the stock market has been on a continuous downslide and recently went into free fall. If this situation continues for a few more weeks, it will mark the current market plunge as the steepest one since the Great Depression.

The selling frenzy is based on fear. Fear fed by the public's wrath over executive wrongdoing and dishonest accounting, doubts about the strength of the economic recovery and lingering worries about more terrorist attacks.

Admittedly, it's hard to see an upside to the present situation. Even the old saying, "Cheer up; things could be worse," doesn't lighten the mood; many people believe that things definitely will get worse.

But I don't. I think a good case can be made for optimism. And Federal Reserve Chairman Alan Greenspan--well qualified to speak on economic matters and hardly a Pollyanna--seems to share my belief. In his regular report to Congress last month, Chairman Greenspan expressed his confidence in the underlying strength of the U.S. economy and his conviction that it would slowly, but steadily, gain ground in all its important aspects.

You wouldn't know it by reading the business press, who seem to be fixated on corporate scandals and the current nightmare on Wall Street, but there are several tangible reasons to be optimistic. A big one is a marked slowdown in wage growth, a circumstance that already is producing increased corporate profits--a development that has been largely ignored by the media. (Wages, which are significantly higher than pre-tax earnings, have an enormous impact on the bottom line.) As this trend continues, companies are likely to resume spending on equipment and facilities and, in some sectors that suffered large job cuts, hiring.

Another positive sign is that productivity is steadily rising at a solid 2.5% to 3% rate, according to U.S. Commerce Department figures. Combine high productivity with slow wage growth and you have the ideal circumstance for corporate profits.

Underpinning these promising conditions are the Fed's low interest rates, which have held at a level well below inflation for many months. This makes borrowing cheap and encourages investment in capital goods, and--when share prices start going up again--even in the stock market. Furthermore, banks, insurance companies and other financial institutions will continue to lend money as long as they can borrow it cheaply. And that certainly doesn't hurt the economy.

While it's understandable that people are concerned about their financial futures, frenzied reaction to the scandal du jour only makes matters worse. In the long run, our nation's economic health--and the stock market's performance--will be determined by time-tested factors: productivity, profits, the availability of capital and corporate investment. And the outlook for all of these is positive.

If the investor community took the long view and the press curbed its appetite for sensationalism, spotting a silver lining in today's dark economic cloud would be a whole lot easier.