What Economists Are Missing
Economists and market pundits have clear beliefs regarding how the economy works. In the view of many, growth peaks when the economy is fully utilizing resources. For example, historically labor force employment increases lead to wage growth, resulting in higher inflation and ultimately higher interest rates. This leads to a slowing economy, and the cycle begins anew. Interestingly, today’s U.S. economy is not working in this fashion. ​​​

Chart for AOM​​

  • In the past companies were able to pass on higher wages in the form of increased prices, creating a strong correlation between wages and inflation. In recent years, however, that correlation has materially declined and now the economy is able to operate with low unemployment and low inflation. What is driving this change?

  • While traditional economists are mystified, it seems that the answer may lie in the rapidly changing technological landscape in the U.S. First, increased pricing transparency due to wide availability of inventory online is weighing on prices. Second, new business models that eliminate the middleman are reducing costs and lowering prices. Third, increased automation is making prices less dependent on wages.

  • The downward price pressure from technology may cause lower U.S. Inflation than traditional economic models would imply. Structurally lower inflation would in turn support equity valuations and potentially extend economic expansions due to subdued interest rates.


The views expressed are the views of Fred Alger Management, Inc. as of June 2019. These views are subject to change at any time and they do not guarantee the future performance of the markets, any security or any funds managed by Fred Alger Management, Inc. These views are not meant to provide investment advice and should not be considered a recommendation to purchase or sell securities.

This material must be accompanied by the most recent fund fact sheet(s) if used in connection with the sale of mutual fund shares.

Risk Disclosure: ​Investing in the stock market involves gains and losses and may not be suitable for all investors. Investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Many technology companies have limited operating histories and prices of these companies’ securities have historically been more volatile than other securities, especially over the short term. Technology companies may also face increased competition, government regulation, and risk of obsolescence due to progress in technological developments.​​​

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