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Markets and Economy

Separating the Economic Mountains From the Molehills

The Federal Reserve’s decisions tend to dominate economic discussion. While monetary policy is important, incremental rate hikes have limited impact on individual workers’ lives. Certain structural forces are playing a much larger role in reshaping the global economy and the future for US households.

The Federal Reserve’s decisions tend to dominate economic discussion. While monetary policy is important, incremental rate hikes have limited impact on individual workers’ lives. Certain structural forces are playing a much larger role in reshaping the global economy and the future for US households.

The Federal Reserve’s meeting may have been at the forefront of economic discussions last week, but incremental changes in monetary policy are far less important for most Americans than structural shifts in the global economy. The emergence of consumer markets in Asia could transform the way the entire world does business. Here in the US, the rapid pace of innovation is displacing entire industries and creating a structural realignment in the economy.

These major economic trends are unfolding over the course of decades, and there’s rarely a single event—much less a scheduled press conference—for reporters to summarize. Despite being rarely mentioned in the news, these forces will eventually dwarf the impact of routine monetary policy decisions, creating challenges and opportunities that could redefine the lives of US workers.

The Limits of Monetary Policy

The Fed holds absolute power over short-term interest rates, allowing policymakers to manage the economy’s performance through the business cycle. However, the Fed’s scope of action is limited by cyclical forces. Rate cuts boosted the economy when there was slack; now that the labor market is tightening, rates are slowly returning to equilibrium.

While policy decisions can affect the economy’s movement through the business cycle—speeding up recoveries and prolonging peaks—the Fed has little control over the forces that are shaping the economy’s long-term evolution.

The Fed’s monetary policy has successfully created the conditions for stable prices and strong demand for labor as the business cycle matures. But the US economy is steadily being transformed by structural forces that are beyond the Fed’s control.

Asia’s Rising Tide

Demand from Asian consumers will soon drive the world’s economy. But economic opportunity isn’t a zero-sum game—climbing consumption in the developing world shouldn’t weaken the US economy. In fact, the opposite is much more likely: As Asian consumers grow wealthier, they’ll be able to afford more high-end goods and services made in the US. China and India will likely become increasingly important destinations for US exports, especially for sectors like aerospace, mobile software and educational services, in which American firms enjoy a strong competitive advantage.

Rapid growth in Asia is already adding more than $1 trillion to the global economy annually, and the region could sustain this pace of growth for decades before living standards in its emerging economies reach parity with the industrialized world.

Innovation Grows the Pie

Technological disruption will also shape the economy’s future, redefining professions and displacing entire industries. Mobile commerce has already reshaped large sectors of the economy, including retail, transportation and lodging. Robotic machinery has completely transformed manufacturing workplaces. In the coming years, automation, artificial intelligence and digital commerce could impact almost every workplace in the US.

The coming wave of technological disruption should be beneficial in the long term. By displacing routine labor and giving new tools to individual employees, innovations will increase worker productivity and boost economic growth. In recent years, innovation-driven productivity gains have likely been masked by baby-boomer retirements, which are removing highly productive, experienced workers from the workforce. But as this demographic shift passes, the underlying acceleration of technology should once again lift productivity.

Over the past three decades, technology’s gains have been unevenly spread. Technology has made workers more productive, but the rewards from their higher output have increasingly flowed back toward the owners—not the operators—of high-tech equipment. Historically high returns on capital investments in new technology have pushed corporate after-tax profits to 10 percent of GDP, about 4 percentage points above their postwar average.

Higher profits have supported the equity market’s long climb, and stock dividends are nearing a record 8 percent of personal disposable income. On the whole, the tech boom has lifted household wealth. But some professions have been displaced, and workers are being challenged to master the skills demanded by the digital economy.

Looking to the Future

The news tends to focus on cyclical developments like quarterly GDP estimates and interest rate hikes. But it’s important not to lose sight of the structural trends that are shaping the economy beyond the current business cycle.

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.

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