The ‘productivity equation’ hits home
Last week I was conducting a historical review of occupancy costs for a longtime client. In the late 1980s the company averaged about $19 a square-foot “all in.” In the early 1990s this figure actually dropped to about $17. By 1999 it was back to $19, and has been rising ever since —$21 a square-foot in 2003 and $24.75 last year.
However, while this firm’s revenues have not grown substantially it has managed costs. Its 2005 occupancy costs (rent, utilities, maintenance, cleaning, insurance, etc.) were nearly the same as 1995. Why? Because the company is doing the same volume of business but using less space. This is all part of the productivity equation.
Companies are producing goods and services using fewer people, less space and less energy, which has allowed them to absorb higher medical insurance costs and reinvest in better technology, although the unit prices for technology have been falling like stones. Now that there is a hint of inflation in energy costs, transportation, and now wages, will U.S. firms be able to keep prices level or will they be able to pass some increases along to their customers?
The answer is yes and no. Global competition is still very strong. Last week I walked through another recently vacated 100,000-square-foot manufacturing facility. The company could not compete at the global price point. Now its widgets are made in China. So for many products, and increasingly for services, there is no option to increase prices. To survive here in the U.S., firms simply must continue to absorb cost increases. And increasingly, this is true for services too.
Quoting economist Jeff Thredgold in his June 14 online newsletter, Tea Leaf: “U.S. economic growth during the past 36 months has been impressive, with plenty of government stimulus in play. Solid growth is likely to continue. In addition, we expect: another 12-digit budget imbalance … consistent employment gains … declining inflation pressures … relative stability in both short- and long-term interest rates … softer coastal housing markets, with more impressive interior performance … and an anxious but impressive global marketplace.”
“An anxious but impressive global marketplace.” That says it all. The U.S. economy’s ability to offset rising short-term interest rates and high energy prices remains impressive, so far. Consumer prices are likely to rise by 3.2 to 3.5 percent in 2006 as oil prices stay stubbornly high.
I recently reviewed the Angilou Associates economic strategic plan for Manchester. The task was to define what kinds of skills were needed to create good jobs and keep the Manchester area competitive in the 21st century. That question is getting more and more difficult to answer by the day. I feel the U.S. has been stalled since the Tech Wreck of 2000 and that emerging nations are catching up to us in a big way. I don’t see the job formation, the good jobs that will buffer our local and regional economy in trying economic times. Therefore, I think we need to rethink the strategies developed in the late 1990s that we would be at the top of the knowledge pinnacle – we would be the inventors with high intellectual input and that this niche would keep our economy healthy and thriving. That we would constantly molt new start-up companies that would hire bright young people and that Schumpeter’s “Creative Destruction” would continue.
I also am not convinced that things are that robust. I think next winter is going to be a very stressful period for a lot of New Englanders.
Bill Norton, president of Norton Asset Management, is a Counselor of Real Estate (CRE), a Fellow of the Royal Institution of Chartered Surveyors (FRICS) and a member of the board of The Initiative for a 20/20 Vision for Concord. He can be reached at firstname.lastname@example.org.