As the economy continues to digitize at an unprecedented pace, why don’t we see faster economic growth and productivity increases? The answer is that the diffusion process of technologies from the New Digital Economy—characterized by rapidly increasing spending on cloud computing, data analysis, and other services in a world of ubiquitous, Internet connections – has only just begun. In a new report on the digital economy, The Conference Board incorporates a suite of economy-wide, industry-specific, and firm-level data alongside interviews with executives in a dozen major companies to examine the progress of the New Digital Economy. In another blog we report on some of the metrics, in particular rapid price declines in ICT assets and services and an ongoing shift from investment in ICT assets to spending on ICT services, underlying our view that the productivity effects have yet to come.
Economy & Business Environment Blog
Despite rapid digital innovation, booming spending on digital services, and spectacular tech-price declines, the New Digital Economy of mobile, broadband, and cloud has had little visible impact thus far on hard measures of growth, productivity, or profits. Optimists argue we just need to be a little more patient. Pessimists suspect that, behind the techno-utopian buzz and bluster, there’s no “there” there. Who will turn out to have had it most right?
Don’t be surprised if inflationary pressures build up steam as the economy gets increasingly constrained by the supply side
In the weeks after the Fed raised interest rates in December, global financial markets trembled and inflation expectations, as measured by the bond market, declined significantly. On February 9, market-based inflation expectation over the next five years fell to just 0.93 percent, the lowest level since the Great Recession. This drop in inflation expectations fueled calls for halting the rate hikes, with a growing cohort of economists and market participants questioning the wisdom of raising rates in the first place.
What do Hurricane Katrina, the stock market crash of 1987, and the U.S. federal government shutdown of 2013 have in common? They were all shocks that temporarily impacted U.S. consumers and, as a result, consumer confidence. None of these events, however, led to a recession.
Flash back to the summer of 2014. Sunny skies, warm days, and consumers were paying, on average, $3.70 for a gallon of gas. But an autumn chill brought a rapid decline in the price of a barrel of oil that carried through the winter months. By the winter of 2015, the price of a gallon of gas had fallen considerably and was hovering slightly above $2.00 (Chart 1). Consumers suddenly found themselves with extra cash, and it didn’t take long for the question to emerge: what were they doing with all the “extra” cash?? Would they spend it and help boost consumer spending? Or would they save it, and maybe even use it to help reduce their debt? Could the US economy be the beneficiary of a prolonged period of declining gas prices?
One big question regarding the US economy is whether wage growth is accelerating. You might think that this is a pretty straightforward question to answer, but it’s not. There are many measures of wage growth, and they don’t all point in the same direction. For example, we can compare the year-over-year wage growth in recent years (Chart 1)according to four different measures, three from the US Bureau of Labor Statistics: the Employment Cost Index (wages and salaries), average hourly earnings (Establishment Survey), median weekly earnings (Current Population Survey), and the new Atlanta Fed Wage Growth Tracker. Some of these measures show a significant pickup, but some show no acceleration at all. What should we make of this?
The productivity slowdown does not result primarily from the mismeasurement of technology output, but from our failure to invest effectively in innovation.
Concerns about a global productivity slowdown are rapidly spreading, as it is increasingly identified as one of the possible causes of the mediocre global growth performance. In a series of reports by The Conference Board we discuss the issues (only for members) and have provided the accompanying measures (publicly available) in detail. A recent report by the OECD is addressing the topic as well.
- The tightening of the labor market, leading to higher turnover and faster compensation growth, and
- Significant slowdown in labor productivity growth.
Looking forward, we believe labor productivity growth is unlikely to bounce back to the rates seen 10-20 years ago. We expect the labor market will continue to tighten, given the historically low trend in labor force growth in the next 15 years.