In a first century fable, Gaius Julius Phaedrus said “things are not always what they seem; the first appearance deceives many; the intelligence of a few perceives what has been carefully hidden.”
At first glance, fables seem like nothing more than entertainment, but hidden within are deeper meanings and truisms. What Phaedrus was telling us was that we need to look deeper, below the surface, to see what the real meaning of the story is.
US gross domestic product (GDP) growth hasn’t been as strong as one would expect at this stage of an economic recovery, still slogging along at a measly 2% rate. But “things are not always what they seem,” and beneath the low headline growth rate lies an economy that’s more potent than GDP stats would indicate.
In understanding today’s economy, one powerful dynamic cannot be overstated: accelerating technological advances are, paradoxically, exerting a major downward influence on GDP.
By driving increased efficiencies and higher production, technology has the effect of increasing supply while lowering prices.
Source: Organisation for Economic Co-operation and Development
A prime example of technological efficiency increasing supply is the oil industry. Advances in technology, such as fracking and horizontal drilling, have allowed U.S. oil production to skyrocket and the price of oil to fall dramatically, as previously unrecoverable oil is now accessible.
Technology is also putting major pressure on prices by putting today’s buyers in a far stronger position, thanks to increased transparency, choice and access to goods and services through global connectivity and e-commerce.
In some cases, technology ends up eliminating price altogether. More and more services that we once paid for are now not only free, but also superior in quality to the versions we once had to pay for. Remember when you had to pay for individual long-distance phone calls or use a travel agent to book a trip? Now we enjoy free maps, e-mail, navigation and access to information from around the world free, courtesy of Google. The list of disruptive companies goes on; Netflix, Amazon, Uber, Spotify and YouTube, are just a few of the companies providing reduced-cost or even free goods and services. These efficiencies make us a wealthier society, but without a corresponding increase in GDP.
Just look at Amazon and how they are single handedly reshaping the retail industry. Did you see the recent retail industry earnings reports? Bad would be an understatement. Amazon and others have dramatically reduced the cost of goods and services, sometimes even making them free, yet they increase our quality of life. But in many cases, they are pressuring GDP downward.