Good news needs to be shared! The future of the economy, markets and wages looks bright!
You may have heard of the term futurist. Futurists study trends of all types and create a vision of the future. I would place this study – which Vanguard refers to as their MegaTrends series – in the economic futurist category.
A team of five researchers at Vanguard wrote a very interesting paper looking at productivity growth past, present and future. They came up with unique ideas, measures and conclusions.
What their research discovered is that productivity growth is enhanced by the generation and expansion of ideas. They developed new metrics to quantify idea creation and their spread.
The researchers saw a recent surge in their newly created Idea Multiplier metric and are predicting an increase of productivity to 1.2% annually over the next 5 years after an anemic average of 0.4%. in the last decade. That represents a tripling of productivity annual growth.
Why should we care? Economic growth follows productivity very closely. Productivity growth equals wage growth. Productivity growth equals strong markets and market returns.
This paper is only available to advisors at this time for compliance reasons. If a client version is issued we will post it. This is a very high level summary. The paper is very thorough with many charts, graphs, equations and over 20 pages total. It appeared to me to be very well documented and well researched; a quality effort. This is not surprising given the reputation of Vanguard.
A little more background follows.
Productivity is a measure of output in percentage terms. Productivity generally grows slowly over time, and just slightly higher annual increases dramatically increases economic activity.
How is productivity measured? If a 15 person company produced $6M in revenue one year and $7M revenue the next year, then their output increased by $1M. Comparing that increase to year one of $6M – then $1M/$6M = 17% productivity increase from year one to year two.
So how has productivity been trending? In the middle of the 20th century it was at 2%. When computers ushered in the information age in the 70’s, it was thought productivity might soar. Unfortunately the reverse happened. The paper shared ideas that have been floated as to why.
The Vanguard researchers developed two new proprietary metrics; one named the “Idea Multiplier” – a time series of academic paper citations within and across industries and countries based on nearly 2 billion records. And, the “Idea Diffusion” metric to measure how ideas propagate around the world helping countries increase their productivity.
I hope that Vanguard releases a version of this fascinating paper soon that can be released to the general public. Good job Vanguard!