U.S. Innovation and Productivity Are Set for a Comeback, Vanguard Economist Says – Barron’s

Joe Davis, an economist at Vanguard, said the decadelong slides in productivity and innovation in the U.S. are over, and he thinks he has the data to show it. Moreover, innovation will come in energy, manufacturing technology, and health care, lifting value stocks.

The decline in productivity in the U.S. economy over the past decade is the most important economic phenomenon currently, and it has confounded economists, said Davis in a Monday session at the Inside ETFs Conference in Fort Lauderdale, Florida. But Davis and his team have used “Big Data” to devise a leading indicator of innovation.

After analyzing data from 2 billion records in 33,000 research publications, Davis’s team’s research shows that the decline in productivity was preceded by a stagnation in idea generation and that, since idea generation has recently spiked, so should productivity.

Davis is an economist who’s not unaware of the power of stories, and he used one to help his audience understand how ideas spread and encourage innovation. Showing a picture of the first flight in Kitty Hawk, North Carolina, he mentioned that the Wright Brothers only succeeded after many failed attempts when they incorporated the insights on the shapes of bird’ wings from a French book.

Then Davis detailed how his team combed through 2 billion records of ideas in research papers and other forms, and calculated how many additional ideas each idea produced. In 1980 that additional idea count, which Davis called a “beta,” was 40. Then it dipped, and came back up to 200. But it stayed there, and Davis thinks that accounts for the lack of innovation and productivity recently. But it recently shot up to over 400, and Davis thinks that’s good news for innovation in the future. How many ideas one idea influences is a leading indicator of innovation.

Davis also said communication across the globe is increasing despite the gloomier options that recently emerged from Davos. That’s part of the reason his ideas beta is so high now, and bodes well for future innovation.

The biggest proliferation of new ideas is occurring in transportation, energy, manufacturing technology, and genetics. Davis made a point in saying they are older economy kinds of areas. And he connected that to the rise of value sectors of the market.

Davis also noted that smaller companies were on the rise. He said if he were at a large company in one of the industries or sectors he mentioned that he’d be “looking over [his] shoulder.” This also runs contrary to much recent economic analysis that suggest large companies have formed oligopolies and shut smaller ones out.

If Davis is correct, the “new normal” of sluggish growth and innovation is over and value companies will be the primary beneficiaries of the new innovation.

Write to John Coumarianos at [email protected]