- NEW YORK (Reuters)
- U.S. productivity revisions due on Tuesday could shatter the belief in
the "new paradigm" economy where strong growth could live with
low inflation, possibly triggering a U.S. stock market crash, a leading
German-based investment bank predicted.
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- Dresdner Kleinwort Wasserstein said in a note to clients
that government revisions to U.S. output made last week meant past productivity
readings would also have to be revised lower when they are released next
Tuesday.
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- Stocks are vulnerable as their valuations are partly
based on the idea of profit-boosting high productivity, which measures
output per hour of labor, the report added.
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- Policy-makers including Federal Reserve Chairman Alan
Greenspan and U.S. Treasury Secretary Paul O'Neill have noted how high
recorded productivity levels have attracted strong inflows of foreign capital
into U.S. asset markets.
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- Last week O'Neill said productivity gains justified the
strength of the dollar, which hit a 15-year peak on a trade weighted basis
last month.
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- The global equity strategists at DrKW see the second-quarter
reading for productivity, which measures output per hour worked, at a "reassuring"
1.7 percent versus a 1.2 percent fall in the first three months of 2001
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- But revisions to earlier readings of productivity, which
underpinned a belief among investors that high growth without inflation
was sustainable, will put a question mark against U.S. financial market
valuations, DrKW said in the report dated Aug 1.
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- "The revisions to productivity next week will undoubtedly
leave Mr. Greenspan looking very foolish," it said.
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- "Investing in the U.S. miracle will in retrospect
be seen as a sick joke. The markets will be forced to confront this harsh
reality on August 7," DrKW Global Equity Strategist Albert Edwards
wrote.
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- "Make a date in your diary! The U.S. 'new paradigm'
will then be officially revised away! The risks of an equity crash are
high," he added.
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- The term "new paradigm" arose to explain the
fact that strong U.S. economic growth during the 1990s failed to trigger
inflation. Many economists credited a rise in productivity, based on technology,
which allowed businesses to produce more without raising costs.
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- This helped drive up stock markets because investors
believed corporate profits could grow at a faster pace than in the past.
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- But Edwards predicted revisions included in the second
quarter productivity data will knock a full percentage point off longer-term
estimates of productivity growth. He said trend productivity growth could
be closer to 1.5 percent than the 2.5 percent many now predict.
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- Because earnings estimates are based on a 2.5 percent
rate, Edwards said the equity market is vulnerable.
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- The Commerce Department announced revisions to U.S. growth
back to 1998, notably cutting 2000 growth from 5 percent to 4.1 percent.
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- High productivity and the "new paradigm" economy
were used by many economists to explain the strong growth and low inflation
in the United States in the last few years of the 1990s. But productivity
skeptics said the miracle was merely a mirage and was due to weak growth
in other parts of the world that depressed prices of commodities like oil.
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- OTHER ECONOMISTS CAUTIOUS
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- Other investment banks take a more cautious line on the
impact of the downward growth revisions.
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- "Despite this, we remain convinced that the "new-paradigm"
is still alive and kicking -- just to a smaller degree than initially,"
Lehman Brothers economists wrote in a research note.
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- Lehman estimates productivity averaged 0.3 percentage
point less over the last three years than previously reported as a result
of the growth revisions.
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- Goldman Sachs wrote on Monday: "The short-term news
on productivity should become a little less dismal. Given the information
currently available on output and hours, we estimate that nonfarm labor
productivity grew about 1.5 percent (annualized) in the second quarter."
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- But Goldman economists added: "A lower rate of return
and increased downward pressure on investment imply that the fundamental
outlook for capital deepening -- which measures the contribution of investment
to productivity growth -- has deteriorated further. This suggests that
our below-consensus estimate of 2.25 percent for the long-term productivity
trend might still be too optimistic."
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