Why ‘old economy’ data is missing digital mark

THE changes wrought by ICT and the way the global economy works have not been properly captured by official data on GDP and inflation, says economist Stephen Jen . . .

The pervasiveness of information and communications technologies has contributed to disinflation and higher productivity, but, as yet, there is no means of measuring its true impact on the global economy, according to leading economic commentator Stephen Jen.
Jen, founder of the London-based hedge fund, SLJ Macro Partners LLP, describes this information gap as “dark matter”, borrowing the expression from astrophysicists to describe what they cannot see or directly measure.
Jen has considerable credibility. According to Bloomberg, he ‘correctly predicted the end of the emerging-market lovefest (and) the sell-off in oil and other raw materials’.
In a recent client note, Jen says the changes wrought by ICT on our lives and the way the global economy works have not been properly captured by official data on GDP and inflation.
He writes: “Since 2001, the rise of China has unleashed a disinflationary impulse that impinged on the rest of the world.  But ICT will likely continue to be disinflationary for the retail sector, depressing the overall CPI, in our view.”  
GDP contribution from ICT is increasingly under-estimated, he believes. “With all the changes that have revolutionised the ways we live and work, it is hard to accept that we live in a world that produces less gains in productivity than, say, the 1980s or even the 1990s.”
Based on data measurements used in the ‘old economy”, he writes that labour productivity has declined in the past decade. According to official statistics, value-added from the ICT industries has remained constant since 2006, at around six per cent of GDP.
Capex in intellectual property products, information processing and computers and peripherals has increased significantly in past decades, while capex in equipment and structures has declined in per cent of total capex.
Depreciation, price and quality of the capex in ICT may be sources of mis-measurements. He says the pace and breadth of growth and reach of ICT will likely remain quite significant, and that these mis-measurements are likely to grow over time. “In turn, such potential mis-measurements raise important questions about macro and monetary policies, which are based on hard data, as well as interesting thoughts about other macro themes that are consequential for the financial markets,” he writes.
“We believe ‘Dark Matter’ is material, even though we cannot prove it yet.
“Perhaps one way to substantiate our view is to ask the counterfactual question: What would happen to global growth and inflation if we were to shut down he Internet and stop innovating in ICT for one year?”
He says traditional economic data is
designed to measure the physiological
aspects of the real economy and not the non-physiological aspects. In many ways, with the aid of ICT the world is evolving to be increasingly dominated by ‘cerebral factors’, not the mechanical or electrical components. ‘Old economy’ data measurements, arguably, have struggled to keep up with changes in the ‘new economy’.
“What we do know is that technological changes are at least as important as the two other major structural shocks impinging on the global economy —demographics and globalisation.  As the global economy evolves into a more ‘cerebral’ phase, we worry that traditional macro data cannot properly capture and measure the true state of the new economy.
 “In turn, policymakers — who have, by and large, ignored the role ICT technology has played in altering macroeconomics — cannot make the right policies if the data is not right.  We suspect both GDP and CPI inflation may be biased downward by ICT.”
He writes: “The puzzle of why global capex spending is so low may also be partly related to the sectors in which firms spend their capex.  One uplifting thought is that ICT has at least enhanced our utility or happiness, even if it has not yet led to measured improvements in labour productivity.
 “The US is the main source of ICT innovations.  It is, in our framework, the country with the largest ‘Dark Matter’.  Equity valuation, future potential growth, and other labour market distortions may be more significant in the
US than elsewhere in the world.”