In an article published a few weeks back in the New York Times, Neil Irwin addressed the “giant contradiction at the heart of the US economy”, namely how seemingly conflicting macroeconomic indicators could coexist.
These indicators – on the one hand, high stock prices, strong job gains and booming corporate profits, and, on the other, low long-term interest rates, plunging commodity prices (oil especially) and market indicators showing persistent low inflation expectations – stand in apparent conflict.
How interesting. What could be happening?
Squaring the circle
Possible explanations offered in Irwin’s essay include blaming slow growth outside the US, distorted markets and the prospect of a slowdown in the American economy. Each of these has some merit, but all feel a bit like rationalisations rather than theoretically grounded explanations.
In terms of global growth, for instance, China’s recent slowdown is depressing only relative to the double-digit growth we’ve become used to. Recent data we collected at SCM World shows that global supply chain leaders anticipate about 7% compound annual growth in China over the next three years. Our data also points to Brazil as the second leading growth opportunity worldwide, ahead of even the US. Europe and Japan may be limping, but most of Asia, the Americas and Africa look strong indeed.
As for distorted markets, it is certainly fair to doubt the wisdom of gangs of traders who feast on volatility; but high stock prices coexisting with low commodity prices makes sense in the face of a dematerialising economy.
SCM World research points to a steadily increasing share of total economic value deriving from pure intellectual property (IP). Examples include Apple’s exploitation of apps and content, Disney’s monetisation of its Frozen characters, or even 3D printing and the maker movement.
Future cash flows rely increasingly less on metals, polymers and oil. Whether or not they can articulate it, markets understand this.
The US economy itself is booming. Job creation data is pointing upward, finally catching some of the momentum of corporate profits. From a historical perspective, this pattern reflects the steepening productivity growth curve associated with digitisation of the supply chain and wider economy.
Erik Brynjolfsson at MIT has been studying this for years and sees a spike in productivity which, quite logically, manifests first as higher profits and later as new jobs. Far from presaging a slowdown, these trends tell me that consumers will finally start spending more and economic growth should thus accelerate.
Productivity beats inflation
The common thread in discussions about how these conflicting signals can persist is bafflement over the persistence of low inflation in the face of rapid economic growth. Classical macroeconomics assumes that inflation accompanies growth and that monetary restraint is vital at the first hint of overheating. This makes sense so long as the principle of “too much money chasing too few goods” rests on a material economy. Rising marginal cost of production is an axiom that suits factories, mines, warehouses and most other physical production assets.
But what happens when the good produced is pure information? The entire concept of scarcity is inverted when one more listener wants the latest Meghan Trainor song or one more gamer signs on to play Halo. Consumers crave content, and businesses are happy to oblige; but increasingly this means nothing to demand for physical goods.
The productivity miracle has been hard to measure because output still generally means units, tonnes or gallons. Monetary stimulus hasn’t produced inflation because material productivity growth has been moving in parallel with a much steeper learning curve in information businesses, which consistently gives us new stuff to buy but never hits the point of diminishing returns.
Digitisation and supply chain
For supply chain strategists this demands that we find ways to dematerialise operations. Vertical integration, for instance, makes sense as a way to extend the power of IP. Digital supply chains, which “ship” product as bits, not atoms, are another way to harness these trends. Mass customisation rewards design and personalisation rather than bulk buying and mega-scale repetitive manufacturing.
The US economy is plenty healthy. Low inflation and interest rates are simply a fact of life in the post-industrial supply chain.