Why have US stocks risen so high over the past year? That debate has focused on the costs of Trumpian instability versus the benefits of corporate tax cuts, but there’s another important angle: Investors now seem to think that steady growth and low inflation are compatible going forward. That’s largely because the tech revolution has taken positive turns toward a future of diverse and highly useful platforms, rather than monopoly and high prices.
Gross domestic product growth for the last two quarters was over 3%, even in light of hurricane damage in August and September, and middle-class income growth has resumed. You might think that would mean high price inflation from credit growth and “overheating,” but the 12-month change in core prices for personal consumption expenditures has fallen to 1.3%.
Quite possibly the American productivity drought is over. There are major technological changes on the way — Waymo, the autonomous car unit of Google parent Alphabet, premiered this week in Arizona a car that doesn’t have a human in the driver’s seat at all.
Low rates of inflation, however, reflect productivity gains that already are here. The tech giants — Google, Amazon.com, Facebook and Apple — have become major managers of our information, our businesses and our lives. They’re meeting political resistance, but whatever you think of those complaints, they are signs the major tech companies are having transformative effects. I used to say that we are overrating what tech has done for us to date, and underrating what it will do in the future. Perhaps reality has caught up with that prognostication.
Amazon, for instance, is no longer just a wonderfully convenient bookseller and retailer, but a leader in cloud computing, artificial intelligence and warehouse logistics, and perhaps soon in drones. The major tech companies are growing their platforms quickly, supporting low prices with scale, product diversity, data ownership and superior service.
Hardly anyone today worries about the eventual disappearance of competition and monopoly prices from Amazon or the other major tech companies. Do you really think Amazon is going to double book prices five years from now? There are too many other ways to access the printed word, and so it’s more likely Amazon will profit by continuing to grow its other business lines. Similarly, even though Apple’s iPhone X is a specially priced luxury item, the trend is for pocket computing power to become cheaper and better.
The tech companies have shown that their radical model of low price, high market share, high quality rapid expansion will keep them profitable for a long time to come. That’s big news but not the kind of information connected to a discrete event, so it receives less attention than President Donald Trump’s latest antics or the progress of the Republican tax bill. Still, I suspect this is the missing piece of the puzzle that helps explain the Goldilocks scenario for the macroeconomy.
Even some formerly expensive tech areas are showing falling prices. There has been a significant drop in quality-adjusted prices for wireless telephone services, which Fed chair Janet Yellen cited in a recent speech as one reason for lower inflation. Cable TV is expensive, but people are cutting the cord for online streaming substitutes. Inflationary pressures from that area probably lie in our past.
At the same time, the earnings reports for the major tech companies have been very positive — so the new regime of high earnings and low prices for goods and services now seems set in investors’ minds. Over time, this paradigm will spread as traditional producers are transformed or absorbed by the tech sector. The expectation of this path for the American economy helps account for high equity prices that otherwise don’t quite seem justified by current earnings. And because of low inflation, the Fed probably won’t have to take away the punch bowl.
I am not suggesting we should approve of this bargain in all ways; it may carry some serious costs in terms of privacy or the quality of social and political discourse. Early waves of industrialisation brought some pretty high social costs, too, and the counter-reaction from social critics was in part of a sign of their transformative power. The changes were ultimately a blessing, but not without major downsides.
The market is finally seeing tech deliver on some of its economic promise, and it’s a more positive scenario than we had expected.
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