While everyone focuses on the Fed, this important topic isn’t receiving as much attention as it deserves. Rick Rieder explains, with the help of three charts.
As the December Federal Reserve (Fed) meeting nears, discussions and speculation about the precise timing of Fed liftoff are certain to take center stage.
But while I’ve certainly weighed in on this debate many times, I believe it’s just one example of a topic that receives far too much attention from investors and market watchers alike.
The Fed has been abundantly clear that the forthcoming rate hiking cycle, likely to begin this month, will be incredibly gradual and sensitive to how economic data evolves, meaning the central bank is likely to be extraordinarily cautious about derailing the recovery and rates will likely remain historically low for an extended period of time. In other words, when the Fed does begin rate normalization, not much is likely to change.
Shifting the Focus to Other Economic Trends
[drizzle]In contrast, there are a number of important longer-term trends more worthy of our focus, as they’re likely to have a bigger, longer-sustaining impact on markets than the Fed’s first rate move. One such market influence that I believe should be getting more attention: The advances in technology happening all around us; innovations already having a huge disruptive influence on the economy and markets. These three charts help explain why.
- Adoption of Technology in the U.S., 1900 to present
As the chart above shows, people in the U.S. today are adopting new technologies, including tablets and smartphones, at the swiftest pace we’ve seen since the advent of the television. However, while television arguably detracted from U.S. productivity, today’s advances in technology are generally geared toward greater efficiency at lower costs. Indeed, when you take into account technology’s downward influence on price, U.S. consumption and productivity figures look much better than headline numbers would suggest.
- Percentage Top 1500 U.S. Stocks with Zero Inventory through Q2 2015
Technology isn’t just transforming the consumer story. It’s having a similarly dramatic influence on industry, resulting in efficiency gains not reflected in traditional productivity measurements.
For instance, based on corporate capital expenditure data accessible via Bloomberg, it’s clear that U.S. investment is generally accelerating. However, the cost of that investment is going down, allowing companies to become dramatically more efficient in order to better compete. Similarly, with the help of new technologies, many corporations have refined inventory management practices, or have adopted business models that are purposefully asset-light, causing average inventory levels to decline over the past few decades. As the chart above shows, among the top 1500 U.S. stocks by market capitalization over the past 35 years, the percentage of companies reporting effectively zero inventory levels has increased to more than 20 percent from fewer than 5 percent, an extraordinary four-fold rise.
- Highly Skilled Labor versus Lower Skilled Labor Trends, 2000-2015
Meanwhile, on the labor market front, greater utilization of technology in business has placed a premium on high-skilled workers who can navigate and innovate alongside that technology. As such, over the past 15 years, we’ve seen considerably faster jobs growth in skilled positions than in lesser skilled ones, as shown in the chart above.
This shift reflects some of the significant influences of technological innovation on the labor market: Highly-skilled labor is rewarded for compatibility with new technologies and is less likely to be replaced by automation or robotics, while the opposite is true for lower-skilled workers, a trend that has kept job growth from being even more robust. This skills-divide also highlights the need for fiscal policies that emphasize education and retraining. In my view, the adoption of such policies will ultimately be much more important to the trajectory of the U.S. labor market and economy than whether the Fed moves away from emergency-rate levels this year or next.
Above all, if there’s one common theme in all three of these charts, it’s this: Technology is advancing so fast that traditional economic metrics haven’t kept up. This has serious implications. It helps to explain widespread misconceptions about the state of the U.S. economy, including the assertion that we reside in a period of low productivity growth, despite the many remarkable advances we see around us. It also makes monetary policy evolution more difficult, and is one reason why I’ve found recent policy debates somewhat myopic and distorted from reality.
So, let’s all make this New Year’s resolution: Instead of focusing so much on the Fed, let’s give some attention to how technology is changing the entire world in ways never before witnessed, and let’s focus on education and training policies that can help our workforce adapt. Such initiatives are more important and durable, and should have fewer unintended negative economic consequences, than policies designed to distort the real rates of interest.