Over the past few months it’s been one dismal report after another on the economic front. Much has been said about the credit crisis, subprime lending, unemployment, and corporate earning forecasts – but is the jury still out on productivity? This missing puzzle could be the key answer as to whether or not the U.S., and the global economy for that matter, will slip into recession during the ’08 fiscal year.

As our elected leaders and the Federal Reserve attempt to bail out the economy, many analyst and pundits believe the story has already been written. With an overwhelming feeling of a severe pullback, which many argue is already upon us, the real question is whether or not we take this year on the chin to soften the landing – or bank on yet an unsustainable rescue mission. Interest rate cuts can only go so low. Just ask the Japanese who had lowered their rate to 0.0% to no avail.

· Relevance of productivity
· Global productivity outlook and comparative analysis
· Conclusive insight for investors

Relevance of Productivity

It is said that productivity is the cornerstone of economic growth. Wealth that is created, handed down, and built upon is a direct result of the continually improving productiveness of a nation’s citizens. It is also worth mentioning that the more productive we are, the easier it is for us to compete in the global markets.

In the end, worker productivity is one the main factors in determining living standards. Toward the end of 2007, this barometer fell sharply at the same time Americans were calling for wage hikes.

Individual worker productivity is measured as a factor of output per hour. Although the last three months ’07 increased at a 1.8 percent annual clip, it is important to have some sort of comparative analysis here. For example, in the quarter prior to the one mentioned above, the U.S. saw a 6.0 percent climb. This would lead us to believe that the overall economic conditions worsened toward the very end of the year. Oddly enough, labor costs during the final quarter of ’07 rose by 2.1 percent.

Overall, annual productivity rose by 1.6 percent, which is slightly better than that of the year prior in which there was only a 1.0 percent gain. Again, we’re looking at a slightly positive scenario, which looks unimpressive when compared to the 3.2 percent average annual increase from 2000 to 2004.

In my estimation, the productivity gains at the beginning of this decade can be in part attributed to the use of technologies that have assisted the average worker make better use of his or her time. The Internet revolution allowed access to data and information on an unprecedented scale. Although this breakthrough was invented in the 1990s, workers had just begun to figure out how to actually use it to their benefit. As each day passed, new software, processing power, and application made it possible to get more accomplished.

Improvement in productivity leads to a rise in living standards because employers can then afford to pay their employee more. It’s a direct correlation because when output increases, costs of developing the product do not – leading to inflation.

Global Productivity Outlook

With regards to the ’08 year, U.S. productivity growth is expected to climb 1.7 percent. Similarly, Japan is hoping their annual rate will pick up and come in at 1.9 percent. Although we’re looking at growth on the low end, these figures pale in comparison to the average annual rates of industrialized nations across the board, coming in anywhere between 1-1.5 percent for the year. On the brighter side, it is anticipated that the U.S. will maintain the productivity advantage over the long haul.

Reports warn that these figures are simply not enough to maintain the current standard of living over the next several decades. In order to accomplish this task, the U.S. will need to provide annual productivity growth in excess of 2.0 percent.

As developing nations, such as China, India, and Brazil, continue to close the research and development and technology gaps, global competitiveness will surely level the playing field over time and present significant challenges to advanced economies. These emerging economies are not only looking to compete on cost, but innovation as well.

What Does This Mean for Investors?

If the U.S. continues to invest monies into R&D and innovation, as we did with the invention of the Internet, then we’ll be able to sustain a relatively comfortable standard of living.

The saying goes, “It is worse to have had money and lost it, than to have none at all.“

Over the past decade, wealth has been leaving the country on a massive scale. China, Japan, South Korea, and even Mexico have all contributed to our thirst for debt. Instead of investing in the future of the United States, we have allowed our infrastructure to deteriorate, which provides the foundation for growth, and are now beginning to slow down with regards to R&D and innovation when compared to the rest of the world.

This is not to say that the U.S. lacks significant strengths. Obviously we are the global leader for a reason. Investors should look to quality companies who place emphasis on these competitive characteristics and have shown the ability to be successful in the global marketplace.

Lockheed Martin (LMT), General Electric (GE), and Google (GOOG) come to mind on the large cap front. They have all climbed to within number one or two in their respective industries and are global in reach.

Additionally, you may want to look into innovators such as First Solar (FSLR), Fuel Cell Energy (FCEL), and Cree (CREE).