This past fall, the BlackRock Investment Institute wrote a very insightful piece called, Interpreting Innovation: Impact on Productivity, Inflation & Investment. This short report took a look at a number of major, complex trends and issues that have an impact to various degrees to all asset classes. One of the many key points it makes is that technology is reshaping our economy and our lives. In other words, we are in a brave new world.
We all know that the saying “this time is different” is code for “take your money and run.” Generally speaking, that is true when you are discussing the fundamentals of investing. However, that metaphor does not work with regard to what is happening with today’s economy. The challenges and opportunities we face today are due to structural and not cyclical changes.
BlackRock’s report highlights a number of key points related to innovation and it’s impact on productivity, inflation and investment, below are a few points that stood out for me.
In BlackRock’s report, the firm notes:
“The correlation between U.S. productivity and jobs growth averaged more than 80 percent over the four decades leading up to 2001. … Productivity gains consistently lead to more hiring. Yet the correlation has collapsed in the past decade. …
The distinction between job categories is becoming increasingly blurry. Software algorithms are starting to replace (or complement) humans — even in professions that need cognitive skills. Think insurance claims processing, fraud detection, equity trading and legal research. Some 65 percent of U.S. workers are in jobs that can be classified as ‘information processing.’”
One key question the report asks, which we all need to reflect on, is: Are we reaching a tipping point of broader adoption due to falling robot prices and exponential increases in computer power?
What are the possible implications of these trends? One key question that could provide context is: Will the increasing level of automation in the information processing field’s productivity improvements add enough to the economy to offset the need for fewer and fewer people in information processing? As fewer people are needed, this could help keep a lid on inflation, which in turn could lead the Federal Reserve to have a shorter and lighter tightening cycle in the future than in the past.
BlackRock’s report does present a balance of the challenges and opportunities. Personally, I am in the optimist camp regarding technology’s long-term net impact to the economy, and this part really captures why:
“Growth pessimists argue the current technology boom has already run its course. What if they are wrong? There could be parallels between the recent period of sluggish growth and the Great Depression.
Financial crisis and soaring unemployment in the 1930s masked what was actually a “golden age” for technological innovation, economic historian Alexander Field argues in The Great Leap Forward. Massive investments in infrastructure and other innovations in the period laid the groundwork for rapid economic growth in the decades to come, Field concludes. The same was true during the 1870–1900 period, when innovations like steam shipping, railroads and mechanized agriculture resulted in deflation.
Similarly, the recent financial crisis could be masking breakthroughs that are not yet captured in the statistics. In addition, many recent innovations such as web search tools are freebies for consumers. They generate activity that does not show up in traditional expenditure-based economic statistics.
The productivity gains of the 1990s and early 2000s were heavily concentrated in the tech sector, Field argues. The implication? We may be on the cusp of a long-term productivity surge as technological innovations ripple through the service sector and broader economy. This would be a bullish scenario for growth — and would suggest we may be underestimating potential growth and interest rate levels.”
Take some time and read the full report; you will find yourself thinking about a number of different issues in different ways.
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John Hunt is conference program manager at Institutional Real Estate, Inc.
