The Cost of Doing Business

For a long time, we've been hearing a lot about how people are concerned over the economy. In the midterm elections earlier this month, voters on both sides indicated that the economy was the single most important issue in determining how they voted, beating out such concerns as Iraq and the war on terrorism.

To many in the media, this concern over the economy seemed odd. By most measures, the economy was doing extremely well: Homeownership was at a record high; stock indices were soaring and in many cases setting new records; unemployment was lower than it was during the Clinton years; interest rates, though the Fed has pushed them up in the past two years, still remained low by historical standards; and household net worth was at an all-time record high.

So what's the problem?
Where was that angst coming from? Very simple -- wages. For the 136 million Americans who work for a paycheck each week or month -- that's 89% of us -- gains have been meager. In fact, in the past six years, these folks haven't seen any wage increases at all; their earnings have been in a state of decline. That's because when you factor in the cost of such things as food, gasoline, housing, education, medical expenses, and all of the other basic necessities of life, we've been paying more and keeping less.

Luckily, things are starting to look up. Recent data suggests that finally, the broad expansion of the economy over the past four years -- which has been a boon to businesses and investors -- is starting to include workers, too. For the first time in six years, wages -- both nominal and real -- are starting to rise, and rapidly, too: October's jump was the largest in eight years, and that followed a similar gain in September.

Most likely, this is only the beginning. Like so many cycles in economics, this period of "catch-up" is a natural adjustment and was bound to happen sooner or later. But what's different now is that this cycle could be longer in duration, because it could be aided and abetted by policy. If the new Democratic Congress lives up to its promises of such things as minimum-wage hikes and income distribution, then wage gains by middle- and lower-income workers may climb more rapidly than at any time in the recent past.

No doubt, this is great for workers and could dispel a lot of the concern that has been in place for a while. But does it become problematic at some point for firms and investors? I ask because they are the ones who have benefited, primarily, from tame wage costs over the past six years. Just as higher prices for food, energy, and other staples ate away at workers' real incomes, higher wages will have a similar impact on the incomes of businesses: They will eat away at profits and, by corollary, investment returns -- unless there is a simultaneous increase in productivity.

That last part -- productivity -- is important, because it is the key to how we should behave as investors over the next few years as this wage phenomenon plays out.

What do I mean by that? Well, do companies sit there and watch their profits decline as they pay higher wages and salaries to workers, or do they increase their investment expenditure to counter the cost of labor? Correctly anticipating this chosen course of action -- or inaction -- can mean the difference between making a lot of money and losing a lot of money.

Some might argue that companies have a third option, which is to eliminate the workers if, in fact, paying for those workers is getting them into an eroding profit situation. However, that might not be so easy, thanks to the newly emerging policy side that I mentioned before . the Democrats and their economic plans, remember?

I am not suggesting that America is about to become France. Companies here, unlike there, will still have the freedom to hire and fire workers as they see fit. However, small changes in such things as minimum wages, taxation, and trade policy here could have equal or similar effects on businesses as reducing the ability to hire and fire does in France. In the end, those changes could reduce U.S. competitiveness and drive up wage costs.

What does this mean for investors?
I doubt that companies will just roll over and accept this. I believe they will counter it with a renewed cycle of investment into productivity-enhancing technology. In fact, I wrote a column about this back in August. In it, I said that we may be in the early stages of another gigantic acceleration in technology investment, similar to what we saw in 1983 and 1991. That's why I am concentrating on technology stocks.

I am a value investor, and I like to wait patiently until good, well-known stocks are sold down to levels that I consider bargains. That's when I scoop them up. I also like it when a large, macroeconomic theme is developing, because I know that I will have both value and fundamentals working in my favor. Coincidentally, one of the stocks I recommended buying in the August article referenced above was Dell (NYSE: DELL  ) , which has since risen by about 20%.

Now I'll give you another name: Motorola (NYSE: MOT  ) . I believe this company and its stock will do well in the coming years. It's a world-class global player with an 8% earnings yield and a strong pre-tax return on capital. Do yourself a favor and scoop some up. And keep your eye on the technology sector as potential changes come down from the new team in charge on Capitol Hill.

More from Mike Norman:

Dell is a recommendation ofStock AdvisorandInside Value. Try out any of our newsletter services free for 30 days.

Fool contributor Mike Norman is an international economist and the founder of the Economic Contrarian Update. He can be seen on Fox News, where he appears as a business contributor. In addition, he hosts a radio show on the BizRadio Network. He owns shares of Motorola and Dell. The Fool has a disclosure policy.


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