Brad Neuman: What Economists Are Missing
Economists and market pundits are generally set in their ways. To them, economic cycles come and go, largely driven by the same recurring forces: the economy grows until it is operating at or above its potential, meaning there are few slack resources, such as skilled laborers seeking employment, then inflation accelerates, the Fed hikes interest rates, and the economy slows.

There is just one problem. The economic theory isn’t working how it is supposed to. The Phillips curve (see definition below) has traditionally shown the inverse relationship between falling unemployment and higher wages and inflation (or vice versa). However, many reports, such as one by the Federal Reserve Bank of San Francisco entitled “Has the Wage Phillips Curve Gone Dormant?” show that the correlation between unemployment and wages has become much less significant over the past couple of decades.i That phenomenon, which can be seen all over the world, may be due in part to an increasingly global workforce and supply chain, which are making the labor pool much larger and cheaper, putting pressure on wages.

But there is something else going on given that data from the Bank for International Settlements shows that the fundamental relationship between unemployment and prices or inflation has deteriorated even faster.ii So what is the force that is pressuring not only wages but also prices more than traditional economic models would suggest?

From where we sit, interfacing with management of the purveyors and users of innovation every day, the answer seems fairly clear. In our view, it is technology that is pressuring both wages and prices through three main avenues:

  1. Pricing transparency: Consumers now have the ability to compare prices at home or in a store with countless other retail outlets, even in industries with traditionally obscure pricing. One example is automobiles, where prices used to hide in the shadows of car dealerships’ sales tactics, but the bright light of the internet is exposing true invoice pricing, which can be compared across dealers on a mobile phone.

  2. New business models: E-commerce companies are cutting cost out of the system by saving on labor and rent of stores, a trend that has much further to go in our view. And business models are evolving even more rapidly, in the sharing economy for instance, where ride sharing or house renting cuts out the corporate middleman, bringing excess capacity on to the market and lowering prices. 

  3. Automation: As robots become increasingly capable, the replacement of workers with machines is serving to lower costs. This year UPS will send 80% of its packages to automated facilities, up from 50% in 2017—such facilities boost efficiency by 25%-35%. Amazon already employs over 100,000 robots transporting inventory, including whole pallets, around warehouses. Such robots can learn tasks as fast as humans, using input from people.iii Siemens recently opened a completely automated battery production facility, from unpacking incoming parts to testing finished products.iv The number of industrial robots is expected to increase 50% over the next three years.v
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What is the upshot of all this? The downward price pressure that technology is putting on the economy may cause Inflation to be lower than traditional economic models would imply. The idea of structurally lower inflation could in turn support equity valuations and potentially elongate economic expansions.


The Phillips Curve, created by economist William Phillips in the late 1950s, describes the inverse relationship between unemployment rates and wages. The theory states that lower unemployment rates lead to higher wages and vice versa. Given the typically strong relationship between wages and inflation, other economists were able to take the theory further to link falling unemployment rates to rising inflation and vice versa.

​​​​iiSee chart 2 on page 3 https://www.bis.org/review/r170920a.pdf

​​​​vInternational Federation of Robotics forecasts 630,000 worldwide robots in 2021 up from 421,000 in 2018


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.​​

The following positions represented the noted percentages of assets managed by Fred Alger Management, Inc. as of March 31, 2019: Amazon 7.1%, Siemens 0.0%, and UPS 0.0%.​
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