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WIA BELIEVES | Tech & The 2% GDP Anomoly

WIA BELIEVES | Tech & The 2% GDP Anomoly

| June 21, 2017

2% GDP Growth – Get Comfortable With It - How technological disruption skews "growth", affects jobs and decreases consumer costs.

In a first century fable, Gaius Julius Phaedrus said “things are not always what they seem; the first appearance deceives many; the intelligence of a few perceives what has been carefully hidden.”

At first glance, fables seem like nothing more than entertainment, but hidden within are deeper meanings and truisms. What Phaedrus was telling us was that we need to look deeper, below the surface, to see what the real meaning of the story is.

US gross domestic product (GDP) growth hasn’t been as strong as one would expect at this stage of an economic recovery, still slogging along at a measly 2% rate. But “things are not always what they seem,” and beneath the low headline growth rate lies an economy that’s more potent than GDP stats would indicate.

In understanding today’s economy, one powerful dynamic cannot be overstated:  accelerating technological advances are, paradoxically, exerting a major downward influence on GDP.

By driving increased efficiencies and higher production, technology has the effect of increasing supply while lowering prices.

A prime example of technological efficiency increasing supply is the oil industry. Advances in technology, such as fracking and horizontal drilling, have allowed U.S. oil production to skyrocket and the price of oil to fall dramatically, as previously unrecoverable oil is now accessible.

Technology is also putting major pressure on prices by putting today’s buyers in a far stronger position, thanks to increased transparency, choice and access to goods and services through global connectivity and e-commerce.

In some cases, technology ends up eliminating price altogether.  More and more services that we once paid for are now not only free, but also superior in quality to the versions we once had to pay for. Remember when you had to pay for individual long-distance phone calls or use a travel agent to book a trip? Now we enjoy free maps, e-mail, navigation and access to information from around the world free, courtesy of Google. The list of disruptive companies goes on; Netflix, Amazon, Uber, Spotify and YouTube, are just a few of the companies providing reduced-cost or even free goods and services. These efficiencies make us a wealthier society, but without a corresponding increase in GDP.

Just look at Amazon and how they are single handedly reshaping the retail industry. Did you see the recent retail industry earnings reports? Bad would be an understatement. Amazon and others have dramatically reduced the cost of goods and services, sometimes even making them free, yet they increase our quality of life. But in many cases, they are pressuring GDP downward.

To understand the modern economy, it’s essential to realize GDP can’t capture many of the free online services, phone apps and the countless other technological innovations that are elevating our quality of life. That notion was underscored by a recent article in The Economist on the pitfalls of using GDP as a measure of the real health of the economy.

A friend of a Hanlon executive owns a very technical, high-quality manufacturing company that serves the pharmaceutical industry. Previously, his field was specialized and had few suppliers, giving him price power. Now, his customers are using the internet to “shop” his prices, making his niche commoditized due to global manufacturing, shipping and the availability of information about competitors’ offerings.

The money we spend goes so much farther than it did in years past. Today we can buy a small laptop or even a smartphone that has the computing power of a million-dollar super computer from decades ago, putting massive information at our fingertips.

Information is power, and it isn’t captured in GDP. So, although GDP has only been growing at 2% per year in this third-longest economic recovery since 1945, there’s more to it as technology has vastly improved the quality of economic output, yet kept the headline growth at lower than usual levels.

There are other reasons for the muted growth; demographic trends have fewer new workers entering the economy, there are historically high debt-to-GDP levels in major world economies, regulatory burdens, currency manipulations, high tax regimes and more. But technology advances too have put a lid on GDP growth.

Lately, technologic disruption has been getting quite a bit of bad press as a job-destroyer. While it’s true there are many industries in which technology has rendered human labor practically obsolete, the flipside is that technology has also created millions of jobs.

A Deloitte study covering census data from England and Wales dating back to 1871 showed that, over a 140-year period, technology was a net job creator, not a job destroyer. Technological advances impact every industry, and the result has been pressure on prices, which alters consumer behavior. As products become cheaper, consumption increases and spreads into new areas, creating new job opportunities.

So, next time you see a GDP number that seems to indicate lackluster U.S. output, look deeper. The quality of our nation’s output is rising—soaring even—but it isn’t being adequately captured in our GDP numbers. Technology is bringing us more and more, for less and less, and GDP doesn’t reflect it.

Technology, through greater efficiency, is putting downward pressure on prices, increasing supply, and making life better. But at the same time, technology is revealing that GDP is an imperfect measure of the economy’s health.

The bottom line: If you’re waiting for 4% real growth, you may be disappointed—but you probably shouldn’t be. With today’s low interest rates, perhaps a steady 2%+ GDP growth is all we will get, and it might be plenty.

Having looked deeper, the moral of our little tale is that the economy is stronger and healthier than GDP tells us. As Phaedrus said, “Things are not always what they seem; the first appearance deceives many; the intelligence of a few perceives what has been carefully hidden.”