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Markets and Economy

What Metrics Get Wrong About Tech

Last week, Federal Reserve Vice Chair Richard H. Clarida named a slowdown in technology growth as one of the main issues keeping interest rates low. But isn’t that counterintuitive in an era of rapid technological advances?

Last week, Federal Reserve Vice Chair Richard H. Clarida named a slowdown in technology growth as one of the main issues keeping interest rates low. But isn’t that counterintuitive in an era of rapid technological advances?


Low long-term interest rates are puzzling. The economy is operating near its full capacity, and demand for credit from consumers and businesses is strong. Government spending on healthcare and other public safety net services is projected to drive the federal budget deficit upward throughout the coming decades; if the public and private sectors began competing with each other for capital, rates would be expected to climb.

But future interest rates are expected to remain quite low, implying a poor outlook for worker productivity growth. This seems counterintuitive in an era of rapid technological advances—shouldn’t emerging technologies bring about a surge in worker productivity?


Is Technology to Blame?

At the Feb. 22 US Monetary Policy Forum, Federal Reserve Vice Chair Richard H. Clarida cited three structural issues that may restrain productivity growth: aging populations, changes in risk-taking behavior and a slowdown in technology growth.

This purported slowdown in technology growth is counterintuitive. Few people doubt the revolutionary potential of new technologies. Artificial intelligence, robotics, Big Data and mobile apps are already transforming large sectors of the economy, and their progress doesn’t appear to be slowing. Emerging fields like genetic medicine and the Internet of Things are already bringing a new wave of disruptive products and services.

But Vice Chair Clarida is right: From the market’s perspective, the economic impact of the tech revolution has yet to be felt in terms of productivity. Throughout the current recovery, labor productivity growth in the US has averaged just over 1 percent annually, less than half its average growth rate through the business cycle of 1995 to 2007.

However, this slump may be due to several factors other than a decline in the potential of new technologies.


The Forces Restraining Interest Rates

Since rates include an inflation premium, part of the decline in borrowing costs can be attributed to the introduction of the Fed’s official 2 percent inflation target. Investors’ expectations are anchored by the Fed’s target, and that has helped stabilize rates.

But the inflation anchor isn’t the whole story. Even after adjusting for inflation expectations, real rates are still historically low, and that may reflect tempered expectations for future growth. Some transitory crosscurrents may also be affecting rates:

  • Central bank balance sheets: Central banks are still holding between $16 trillion and $20 trillion in excess assets left over from quantitative easing programs. In the early years of the recovery, large-scale asset purchases successfully pushed long-term borrowing costs down. But the absence of this debt from the market may be contributing to lower rates today.
  • Global savings: Trade imbalances in the developing world have raised the global saving rate, injecting capital into the US bond market. When trade surpluses abroad are recycled into US corporate debt, borrowing costs tend to fall—especially as growing consumer activity spurs demand for imported goods.
  • Liquidity regulations: New regulations require banks to hold larger liquid reserves, creating stronger demand for US Treasurys, which keeps yields down.


The Productivity Puzzle

Relatively weak worker productivity growth is also playing a role in keeping rates down. However, some of the reasons behind disappointing productivity may also prove temporary:

  • Demographic shifts: The wave of baby boomer retirements has slowed the rate of workforce expansion from over 200,000 new workers a month a decade ago to around 65,000 a month today. In addition to slowing the overall growth of the labor force, retirements are also diminishing worker productivity. When experienced workers retire, they take valuable skills with them. This trend will eventually subside as new hires come up to speed, but the falling average age of the workforce is acting as a drag on productivity.
  • Boom-time expansion: Worker productivity can be quite cyclical, and the top of the business cycle has always brought slower productivity growth. In a downturn, businesses are forced to do more with less. They may lay off their least productive workers, forcing the remaining staff to pick up the slack. But as the economy regains its strength, climbing revenues allow businesses to staff up. Companies may even choose to hire above their current needs to prepare for rising demand. 
  • The changing labor mix: As the US grows wealthier, its economy has been undergoing a decades-long shift toward the service sector. Service industries are highly labor-intensive, which means fewer opportunities for productivity gains. For example, there’s a limit to the number of tables a waiter can serve in an hour, and productivity-enhancing technologies will have limited power to improve that number.
  • Missing healthcare innovations: The healthcare sector’s footprint has doubled over the past 40 years, growing to encompass approximately 18 percent of the US economy today. But improvements in the quality of care are difficult to quantify in economic terms. Significant medical advances have improved patients’ quality of life over the past decades, but those gains can be missed by traditional measures of economic output. It’s difficult to put a dollar value on the increased mobility and independence that new prescription drugs and surgical procedures can bring; as a result, healthcare workers—who now account for nearly 13 percent of the workforce—may be underrepresented in official productivity statistics.
  • Delayed benefits from automation: When technology makes certain job skills obsolete, those who lost their job to automation may struggle to find another job earning the same amount of money. When workers are displaced by innovation, they’re often forced into any role they can find, which may not be as productive. It may take time for the benefits of technological advances to play out.


Trust Your Intuition

Futures markets may not be pricing in a technology-driven boom in worker productivity, but the steady advance of technology is undeniable. Corporate profits are soaring as a handful of superstar firms harness new technologies to capture an ever-larger share of the market. Tasks that once took hours now take minutes thanks to productivity-enhancing software. Shopping malls are being replaced by distribution centers as an increasing share of commerce moves online. People are using gig-economy apps to put idle resources into productive use.

And the nation continues to grow wealthier, with real living standards and household net worth posting record highs. No one doubts that new technology is rapidly transforming the economy, even if its impact on interest rates has been slow to emerge.

View our economic commentary disclaimer.

Jim Glassman, Head Economist, Commercial Banking

Jim Glassman

Jim Glassman, Head Economist, Commercial Banking

Jim Glassman is the Managing Director and Head Economist for Commercial Banking. From regulations and technology to globalization and consumer habits, Jim's insights are used by companies and industries to help them better understand the changing economy and its impact on their businesses.

Jim Glassman