Home > Data, Productivity > The hidden 2011-2 “investment” boom?

The hidden 2011-2 “investment” boom?

To keep my comment section happy, here is some “productivity scepticism”.  I like this theory from Paul Donovan of UBS discussed in a Guardian article, here quoting Donovan:

“In 2000, 32% of UK businesses were employers. By 2014, 24% of UK businesses were employers. This raises the obvious question of what on Earth 76% of UK businesses were doing if they were not employing anyone – and the answer of course is that they were single person businesses where the owner was the sole person ‘on payroll’.

This matters for capital spending, because people setting up as self-employed – for example, as a consultant – may well make little or no upfront investment in kit. Says Donovan:

“If you are a self-employed consultant, you probably already have a laptop, have a car, have an office at home. As the boundaries between home and work blur, we are making better use of the capital we have got.”

“What this means is that investors looking for a “capex recovery” may be missing the point. The secret capex story may be that businesses make better use of non-business assets, and that part of the capex cycle … masquerades under a ‘retail sales’ pseudonym.”

One of the puzzling parts of the UK productivity puzzle is the divergence of employment and output during late 2011 through 2012, when output barely grew and employment soared.  If output and employment are both growing we can use the “low-skilled labour supply shock plus composition effect” theory to explain slow average productivity growth, but that doesn’t work well for this period.

We can (partially) resolve this problem by revising up 2011-2 real GDP, and Donovan’s theory could help here.  2011-2 saw a self-employment boom; if capital investment by the self-employed shows up only as consumption, or not at all, then measured GDP was too low.  The recovery in household consumption of durable goods has been much stronger than total consumption, up 19% from 2008 Q1 to 2014 Q1 versus 2% for the latter.  One of the upcoming ONS methodology changes is to remove a £500 lower bound on what counts as capital spending in the business investment survey, perhaps this will help.

UK Self-employment vs Durable Goods

UK Self-employment vs Durable Goods.  Source: ONS MGRQ , UTID

File under “grasping at straws” if you prefer.  There are good reasons to be sceptical there is any significant bias in measuring GDP, and other survey indicators (PMIs etc) suggest the 2011-2 quasi-depression was roughly that.  Stories about the unemployed being pushed into “false” self-employment could make us doubt the jobs data instead, though again it would be surprising if that was sufficient to explain such a large shift in the labour market surveys.

 

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Categories: Data, Productivity
  1. ChrisA
    May 18, 2015 at 15:26

    You are too kind to your commentators!

    But isn’t this the biggest question of the day? Was it Paul K who said that “Productivity isn’t everything but in the long run it is almost everything”? If we really are having productivity stagnation this is really massive and dwarves any other political or economic question. We are still arguing about what caused the Industrial Revolution after hundreds of thousands (millions?) of years of stagnation. So perhaps it was all just a lucky run, two or three innovations that fortuitously happened in the last 200 years instead of over Millenia and now they have run out and we just have to wait for a thousand years or so for the next one.

    Naah. I just don’t believe that the world I am living in now is stagnating. My I-phone would be consider a miracle just 10 years ago. The internet would be a miracle just 20 years ago. That I can watch a TV show in high definition on my laptop from remote parts of the world by the telephone system is still amazing to me. If you want tangible industrial stuff then fracking tight oil is right up there with the bessemer process in my view. In 2009 tight oil production was impossible. In 2015 its driving the Saudis’ out of business and the US suddenly has 4 of the biggest oil fields ever discovered. That’s productivity.

    So my gut tells me this is just a measurement issue. The world is changing so fast our measurement process is not able to keep up. Sure part of this is where companies can piggy back off consumer infrastructure (I used Skype today for a 3 hour work telecon) so what looks like consumption is actually investment. But mostly to me it is higher and higher quality at the same price. High speed phone networks, HD youtube, better hotels, better price comparisons, wider range of selection and so on. None of this can be measured easily, but it all adds utility at an ever increasing rate.

  2. jamesxinxlondon
    May 18, 2015 at 22:11

    Thanks for trying.

    This piece I’ve mentioned before gets more and more quaint every year, almost every month, as things change so fast in the service sector.
    http://www.nber.org/chapters/c10131.pdf

    Trying to find something new on the topic I did come across this, that at least tries to lay out the conceptual issues.
    http://www.inzeko.ktu.lt/index.php/EE/article/download/11284/6009

    Good to see “engineering economists” worrying about it. At least they know what they don’t know, unlike SW-L over at Moaning Macro along with all the other Keynesians who can’t criticise the Tories for delivering jobs, so fall back on the concept of the wrong sort of jobs – but never get their hands dirty with any detail whatsoever.

  3. jamesxinxlondon
    May 18, 2015 at 22:13

    Last brainstorming thought, tapped out on my iPad.

    Remember the U.S. leads the world in “hedonic adjustments” to GDP. No wonder they’ve had better productivity. And I bet they included the iPhone (introduced in 2007) in their measurements. I bet we didn’t, having only just phased out fax machines.

  4. May 18, 2015 at 23:16

    It is nice to see so much optimism over here :)

    I am certainly 100% a “long-run optimist” on tech/smartphone/internet, I agree there. I’m guess I’m sceptical that the short-run (i.e. since 2008) data is very wrong, because a) quality/measurement issues seem unlikely to have got that much worse since 2008. b) the things it is easy to get excited about are a small % of UK consumption. In the US you have a shale boom, in UK we have a boom in… solar panels and wind farms requiring large government subsidies and expensive infrastructure? It doesn’t look like a high-productivity boom.

    Another paper for sceptics:

    https://spiral.imperial.ac.uk:8443/bitstream/10044/1/21167/2/Haskel%202015-02.pdf

    “We find that 33% of the TFP productivity puzzle can be explained by arguably structural weakness in the oil and gas and financial sectors.”

    via http://haskelecon.blogspot.co.uk/2015/04/the-uk-productivity-puzzle.html

  5. jamesxinxlondon
    May 19, 2015 at 07:44

    A small % of UK consumption in monetary terms, but a huge % in terms of time consumed. That’s one of the features of a productivity revolution, something that took ages before now takes seconds.

  6. ChrisA
    May 19, 2015 at 16:38

    BM – I agree that shale is small beer for the UK. Just an example though of an endogenous real growth surprise occurring even in the most basic long lived industrial sector where some people would have it that the low hanging fruit has already been picked.

    But on your objection is that it is hard to believe that the new economy has developed since 2008 that’s almost exactly the point. 2008 was at the end of the dial up era, and just before the smart phone era. Two massive changes in the way we interact. A good example is facetime – a videophone technology that operates for free. How is that being measured when videophones didn’t even exist 10 years ago?

    But I accept believe some short term factors are in play in the UK as well. I agree that finance and oil and gas have taken a hit due to special well known issues on those industries. I also agree with the recent comments from Carney about low cost immigrant labour which almost certainly is leading to labor substitution for capital. I think this is a big change for the UK, akin to the de-unionisation which occurred during the 1980’s. But the productivity issue is worldwide (at least in developed countries) so while you can explain a lot of the UK issue with these special factors, you have to accept that there is also a secular trend here beyond the short term in UK.

  7. May 19, 2015 at 21:21

    The data is garbage #4. Here’s a noble attempt to grapple with the data problems and some pretty frank admissions the stato’s are struggling to keep up. Still trying to get their heads around “tablets” rather than focusing on “smartphones” (no Apple-favouritism allowed).

    http://www.federalreserve.gov/econresdata/notes/feds-notes/2015/recent-slowdown-in-high-tech-equipment-price-declines-some-implications-for-business-investment-labor-productivity-20150326.html

    “Products that may need further attention: Products other than laptop PCs, desktop PCs and servers may require more careful effort to control for quality. Most notably, the BLS does not estimate a hedonic model for tablet PCs. This limits the options available to price analysts attempting to control for quality in this increasingly important product.”

  8. ChrisA
    • May 26, 2015 at 11:20

      Thanks Chris. I was surprised by Tyler’s comment that he hadn’t thought about this before! My comment section clearly has more sophisticated discussion than MargRev. :)

      • ChrisA
        May 26, 2015 at 13:46

        Yes me too. Actually there were many good comments in the comment section.

    • May 26, 2015 at 14:30

      In a few decades maybe “imputed consumption of Youtube” will be as large a % of GDP as imputed rent is today… same concept, isn’t it?

  9. May 28, 2015 at 08:45

    http://ftalphaville.ft.com/2015/05/27/2130417/goldman-goes-astray-on-grand-theft-auto-and-productivity/

    What macroeconomics needs is more arguments about hedonic quality adjustment and computer software!

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