The top panel of figure 5.7 shows the log of real output per hour for the
nonfarm housing private economy, along with the same log real earnings
series we plotted in figure 5.4.^10 Note that productivity has virtually the same
growth rate as real S&P earnings, but productivity has much less volatility,
it more nearly hugs a trend line. The bottom panel of figure 5.7 shows ten-
year growth rates of output per hour and real earnings. There are some
short-run comovements in the two series, probably reflecting the short-run
effects of recessions on both profits and productivity.
Figure 5.8 is a scatter diagram with the ratio of price to smoothed ten-year
earnings on the horizontal axis, and the subsequent ten-year growth in pro-
ductivity on the vertical axis. We see that the price/smoothed-earnings ratio
has virtually no ability to predict future productivity growth. A scatter with
the conventional price/earnings ratio on the horizontal axis, not shown here,
is even less successful. These results do not support the view that movements
in stock prices reflect rational forecasts of future productivity growth.
VALUATION RATIOS 185
Figure 5.7. Output/hour and real earnings.
(^10) Robert J. Gordon (2000, figure 3, p. 66) supplied the productivity series. His multifactor
productivity is fairly similar in appearance to the output per hour series used here.