Measures do not reflect technology benefits
Automation, robotisation and miniaturisation are changing wondrously the way goods and services are produced and consumed, including the medical treatments that can keep people alive and healthy for longer. To these forces of change could be added the internet of things, which connects people ever more effectively.
However, the benefits of the technological revolution that can be seen and felt taking place are not at all obvious in the measures used. US productivity growth is said to be continuing to grow very slowly. Real GDP is growing as slowly, as are wages and incomes adjusted for inflation. It is apparent that Americans are not getting better off at the pace they used to and are frustrated with the politicians they hold responsible.
Is people’s intuition at fault, or is there something wrong with the way in which the prices of the goods and services consumed over time are compared? All measures of output and incomes are determined in money of the day — calculated and agreed to in current prices.
They are then converted to a real equivalent by dividing some sample of output or wages estimated at current prices by a price index or deflator.
A price index measures the changes in the prices of a fixed “basket” of goods and services thought to represent the spending patterns of the average consumer. The deflator calculates the changes in the prices of the goods and services consumed or produced now, compared to what would have been paid for them a year earlier.
Both estimates attempt to make adjustments for changes in the quality of the goods and services people are assumed to consume. A car, painkiller or cellphone bought today on today’s terms may do more for people than it would have done at a lower price, or possibly a higher price five or 10 years before. It is not the same thing with which price comparisons are being made.
A piece of capital equipment now, robotically and digitally enhanced, is very likely to produce many more “widgets” than a machine similarly described 10 years ago. And it may cost less in money of the day. It is a much more powerful machine and firms may make do with fewer of them.
Their expenditure on capex, relative to revenues, may well decline, indicating (wrongly perhaps) a degree of weakness in capital expenditure.
The problem may not be a lack of willingness of companies to invest more, but how the real volume of their quality-adjusted investment expenditure is quantified and measured.
There is clearly room for moving the rate at which a price indexes increases (inflation) a percent or three higher than they would be if quality changes — what the devices do as well as what they cost — were implied differently and more accurately. And if so, GDP and productivity growth would appear to change with equivalent speed.
It is instructive that the US Federal Reserve targets 2% annual inflation — not zero inflation — because 2% inflation, quality adjusted, may not be inflation at all. And zero inflation may mean deflation — prices actually falling, enough to discourage spending now to wait unhelpfully for better terms in the future. Over the past three months and more there have been no increases in retail prices in SA. According to the retail deflator, the annual increase in retail prices fell below 2% in January and is far lower than headline inflation.
The Reserve Bank should recognise that the state of the economy, coupled with the stronger rand, leaves manufacturers and retailers with very little pricing power.
Nominal borrowing costs, well above business inflation, are applying a significant real burden for them. They could do with relief.
Kantor is chief economist and strategist at Investec Wealth & Investment. He writes in his personal capacity.