When Economic History Improves With Time

The rates of US economic growth and especially personal saving have been higher than previously believed, according to revised data from the Bureau of Economic Analysis. But it’s not all good news, because the largest economic imbalances remain unchanged.

Seldom does a dense report from a statistical agency take your breath away, but the latest publication on the United States’ national income accounts from the Bureau of Economic Analysis (BEA) is the exception that proves the rule. The publication, after all, is the BEA’s comprehensive, bottom-up quinquennial reassessment of income, output, and prices going back to the Model-T days of economic activity.

Wading into the review’s details, one finds a slightly improved outlook for medium-term growth. Moreover, the data on personal saving suggest somewhat fewer vulnerabilities and more resilience in the household sector. On the other hand, the review changes nothing concerning the two yawning holes – the twin fiscal and external deficits – in the national accounts.The report requires economists to revise our view of the US economy. First, two bits of good news. In addition to reporting that real GDP increased at a 4.1% annual rate in the second quarter of this year, output in the first quarter was revised upward somewhat, and this was preceded by considerably more income growth. The net effect does not change the big picture – the US still took six years to dig its way out of the Great Recession – but the growth trend (averaging output and income, which is a more reliable measure of activity than either alone) was faster than previously believed. This is significant because, thanks to compounding, small increases in a growth rate produce large benefits down the road.

Far more important, the extra income was not matched by newfound household spending. In nominal terms, the level of personal saving is nearly double what was reported over the prior four quarters. Relative to disposable income, the personal saving rate is now estimated to be 6.8%, not the 3.2% reported in May. Moreover, the saving rate has been moving sideways, at above 6%, over the past five years, rather than falling precipitously, as was previously thought. The upward revisions go even further back, with the percentage differences between updated and prior data on nominal personal saving in double digits since the mid-1990s.

The national income accounts, it seems, have caught up to balance-sheet reality. Since the financial crisis, US households have deleveraged and built up wealth. According to the Federal Reserve, they added about 1.75 years’ worth of disposable income to their net worth from 2008 to 2017. Based on these data revisions, a heftier portion of this wealth accumulation came the old-fashioned way, by consuming less income.
The revision of data for household spending patterns lends support to the economic outlook. If American families are not currently overstretching their paychecks, they have resources to continue to increase their spending. While real growth rates of 4% or higher are not in the immediate future, the US economy will probably expand by 3% in 2018, a pace not achieved in a dozen years.

Economic growth at that pace exceeds the expansion of aggregate supply, straining resource use and prodding the Federal Reserve to continue along its path of gradual interest-rate renormalization. But slowing that pace looks less compelling in light of the new data, which suggest that financial-stability risks should be pushed further down the Fed’s worry list. After all, households that are saving twice as much as previously suspected should be expected to be more resilient when confronted with rising interest rates.

Such resilience will be tested over the longer run, though, owing to the fiscal and external imbalances, which were unaffected by the data revision. Part of the analytical attractiveness of the national income accounts is that they add up. If a country saves more but investment remains unchanged, then it borrows less from (or lends more to) the rest of the world. Its net export position and current-account balance improves.

But that did not happen in this case. The large increase in saving was offset by smaller increases in investment, inventory accumulation, and the statistical discrepancy. Nothing changes the grim reality that America’s current-account deficit is headed to more than 3% of nominal GDP, implying increased reliance on foreign investors. The US is manufacturing the dollars that foreigners crave, but that is it for now.
Moreover, there was no wand that the BEA magicians could wave to alter the dominant feature of the economic landscape: spending by the federal government outstrips its revenues by a wide margin before and after the data revision. The budget deficit will surpass $1 trillion this year, and, with growth already above its potential rate and unemployment well below its natural rate, the cyclical argument for such stimulus is weak. The concomitant accumulation of debt will weigh on future economic activity and exacerbate financial vulnerabilities.

But not now. We have learned that the economy is expanding slightly faster and households were more thrifty than previously thought. Count this as another case of history reading better than it was lived.

Rethinking the Internet of Things

Every business in every industry could benefit from advances in digital connectivity, as the “Internet of Things” allows people to manage assets better and make more fully informed decisions. But to realize the potential of IoT, the world must first re-imagine how networks are used.

At a telecommunications conference hosted by Huawei late last year, I told a group of senior executives looking for growth opportunities in a saturated market that one billion new mobile subscribers were just waiting for their services. Then, I showed them a photo of a cow.

People took pictures of my presentation with their smartphones. Some chuckled; maybe they thought I was joking. But I was dead serious. Chinese dairy farmers are already connecting their herds to the Internet. Cows wear collars with wireless sensors that collect biometric data such as body temperature and heart rate. Insights from this information are then used to improve milk production, helping farmers earn an extra $420 per cow each year, and increase overall profits by 50% annually.

For China’s farmers, more data means more money in the bank. But, whether the business is bovines or brain surgery, information always enhances decision-making. That’s why those of us in the telecoms industry believe the world would benefit by reimagining digital connectivity.

Connecting more “things” to the Internet has the potential to increase efficiency, lift productivity, reduce waste, and fuel economic growth. According to a McKinsey Global Institute study, a fully networked Internet of Things (IoT) could add up to $11 trillion to the global economy every year by 2025. Realizing these benefits, however, will require changes in how data are delivered and managed.

Today’s broadband networks were built to serve people; they are used to make phone calls, chat by video, surf the web, and play online games. While these applications are important, they are fairly limited in scope.

Scenarios for connecting things are much more diverse. For example, a networked shipping container crossing the ocean must have extended wireless range, but it doesn’t need super-fast response speeds. The opposite is true for virtual reality headsets, which require ultra-low delay, or latency, to give viewers an immersive experience. By 2025, the world will have some 100 billion connected devices, and to derive maximum value from these linkages, we will need to optimize our networks for things as well as people.

The first step in doing that is ensuring that future networks have enough bandwidth to handle applications like high-definition video, which will soon account for the majority of user traffic. A particular challenge will be upgrading systems to handle industrial video, which is fast becoming integral to modern manufacturing. For example, chip foundries use machine vision to check integrated circuits for microscopic defects, a process that requires extraordinarily high resolution. To transmit this information, cameras need bandwidths of up to ten gigabits per second, and a single factory may have 1,000 cameras running simultaneously.

Second, when it comes to data latency, today’s networks are designed for human perception, which tolerates a fairly high degree of delay. On a phone call, for example, a 50-millisecond wait is imperceptible to the human brain. Power grids, on the other hand, need a consistent latency of 20 milliseconds or less. To support connected grids, “smart” robots, and other machines, next-generation networks will need to be faster and have even greater capacity.

Third, the networks of tomorrow will need to be automated, self-optimizing, and self-repairing. Artificial intelligence will allow basic network functions to be placed on autopilot, and simple economics will make this a necessity. Once the IoT is supporting billions of connections among cars, trains, factories, and hospitals, operating costs will skyrocket unless networks can be maintained with little human intervention.

And finally, to bring the IoT to life, policymakers will need to support the development of advanced networks that can transmit larger volumes of data faster. In particular, the wireless spectrum – airwaves across which data travel invisibly to and from connected devices – will form the basis of many digital services. But spectrum, just like water and oil, is a limited resource. Most countries will need to release more spectrum space for wireless communications, increasing usable airwaves by anywhere from 50% to 100%.

Every business in every industry can benefit from these advances. New connections will deliver value to entrepreneurs, societies, and economies, allowing people to manage assets better and make more fully informed decisions. But to realize this future, we must begin thinking differently about how networks and business models interact. After all, in a world of deepening connections, everything is a potential new subscriber.

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