On Tuesday, we heard yet another affirmation that this economy is kicking back into gear. If only investing America would listen.
Overall, productivity has reached a remarkable 8.6 percent -- and a superlative 11.2 percent at an annual rate for non-financial businesses. These are incredible numbers that attest to the ongoing, new-economy influence of the technology sector. That's right, technology, and don't let anyone convince you otherwise. Technological innovation, and the spillover of tech into other sectors, is keeping Americans busy and has this economy locked on its corrective course.
First and foremost, rising productivity acts like a tax-cut on the economy because it stimulates more growth and profits. And since inflation can be thought of as too much money chasing too few goods, and a productivity tax cut raises the volume of goods, our inflation-sensitive Federal Reserve has little to worry about in this environment. What the Fed can now do is be a little looser with the money, and provide plenty of new cash that can accommodate the existence of more goods -- all without igniting inflation.
There's even more good news for economy watchers. Sky-high output-per-hour trends are depressing unit labor costs. They are down 5.4 percent in the first quarter and have dropped 0.9 percent over the past four quarters. This will almost certainly generate the future profits that will exceed all but the rosiest expectations.
And here are some key numbers to figure into these upcoming profits. Most investors overlooked the 8.5 percent fourth-quarter increase in corporate cash flow and the 18 percent pre-tax rise in profits. These are GDP profits taken from the national income and product accounts, and they're the real deal. Market players should pay attention to these numbers and give them the weight they deserve. Not only is America producing, but its companies are making money.
Investors also have to figure in the fact that the Fed's recent monetary stimulus has ended deflation and moved the economy toward price stability. When combined with lower tax burdens and miraculous productivity, a 30 percent rise in economic profits this year is not unreasonable. And we also may be looking at an S&P 500 index that's more than 30 percent undervalued.
When you review all the positive data at our fingertips, and then witness the Dow Jones struggling to regain the 10,000-point plateau, you have to scratch your head in bewilderment. But investors must remain positive. There will be no double-dip recession. Interest rates and inflation will remain low, and productivity will stay high.
So stay optimistic. Better times are coming.