Technology, Data and Stock Markets

Intersections & Impacts

18 May

Impact of Technological Change

The shift towards a digital world has reoriented human life away from the physical world and towards a virtual reality of our own creation. Our social relationships have transferred to the online world. This shift may encourage people to identify with virtual communities rather than the physical communities around them, which could have profoundly disruptive impacts on cities and even nations, which are organized around physical territory.

Wisdom and know-how were once profoundly valuable personal attributes, but now they're much less of a reason for distinction. The internet doesn't just find things for us or allow us to communicate; it also stores information in much larger volumes than any other medium that came before.

The Rise of Artificial Intelligence (AI) and Its Impact on the Global Economy

AI is set to have a significant impact on the global economy, with estimates suggesting that 18% of work could be automated by AI. The impact will be felt most heavily in high-income countries, with office and administrative, legal, and architecture and engineering jobs being the most vulnerable. The least exposed will be in construction, installation, and maintenance. The social and political impact of such shifts could be significant, with the danger of downward mobility of the middle and upper-middle classes.

AI offers the promise of unbiased judges, improved scientific endeavors, but also the possibility of a world filled with impeccably forged information, images, and identities. There is also the risk of more powerful monopolies and plutocrats, almost complete surveillance by governments and companies, and far more effective manipulation of the democratic political process.

Innovation and Economic Growth

Innovation is a key driver of economic growth, as it leads to the development of new products and services that increase productivity and efficiency. Investments in infrastructure, education, and research and development are essential for fostering innovation and promoting long-term economic growth. It is important to recognize that economic growth does not automatically translate into an improved standard of living for all individuals. Policymakers must address these issues of inequality through progressive policies. Some policies being considered are progressive taxation and social safety nets to ensure that the benefits of growth are shared more equitably.

Government Policies and Economic Growth

The role of government in promoting economic growth is a subject of ongoing debate. Some argue that government intervention can hinder growth, while others believe that targeted policies such as subsidies and tax incentives can encourage innovation and investment. Achieving sustainable economic growth requires a multifaceted approach that considers various factors, including innovation, investment, inequality, and government policies.

Stock Market Implications

This rapid technological & social transformation has had a significant impact on stock markets. The rise of digital platforms and trading has made it easier for individuals to invest in stocks, leading to an increase in retail investors' participation in the market. More people are now able to access the stock market and potentially benefit from its gains.

This increased reliance on technology has also led to new challenges for stock markets. The rise of algorithmic trading and high-frequency trading has increased market volatility and raised concerns about market manipulation. Additionally, the growing importance of technology companies in stock market indices has led to concerns about overvaluation and potential bubbles in the tech sector.

The Impact of Censorship

Censorship has historically been used by governments to control the spread of religious and political ideas. In the current context, censorship is being employed to stifle free speech and shape public perception of truth and falsehood. This can have significant implications for the stock market, as investors rely on accurate information to make informed decisions. Censorship is not an insurmountable obstacle, as human curiosity, technological innovation, public rebellion, alternative media, and resistance have historically undermined attempts to control information.

Deflationary Pressures and Regional Banks

The current economic situation is characterized by deflationary pressures, which are now affecting US regional banks such as PAC West. Deflation occurs when there is a general decline in prices, often driven by a reduction in the supply of money or credit. This can lead to lower interest rates, reduced investment, and ultimately, slower economic growth. The US Treasury curve and the German curve are both showing signs of steepening, with the front end of the curve going down faster than the long end. This indicates that interest rates are expected to decline in the near future, potentially exacerbating deflationary pressures.

 

Economic Forecasting Importance

Economic forecasting has been criticized for its inaccuracy, especially in the face of multiple shocks such as the pandemic, war, and geopolitical changes. The recent upward revisions of growth and inflation projections by the Bank of England have raised questions about the reliability of economic forecasts. The US Federal Reserve, the European Central Bank, and the IMF have also made errors in their inflation forecasting. Accuracy in economic forecasting is crucial as it informs the decisions of investors, households, and policymakers. Central bankers need to have a record of decent forecasting to build credibility and anchor inflation expectations.

Improving Economic Forecasting

To improve economic forecasting, economists should draw on expertise beyond the economics profession and explore how advances in big data, machine learning, and AI can offer opportunities to better model complexity. Improving how forecasts are communicated, particularly in times of uncertainty, is essential. Showing projections under different scenarios can help deepen understanding of the range of possible outcomes. Central banks could also convey probability distributions around their forecasts in a more accessible way.

The Accuracy of Economic Data and Its Implications on the Stock Market

Real-time data is not always reliable, as seen in the historical revision level of GDP releases. The way real investment in commercial construction is calculated has resulted in understated historical GDP. The Bureau of Economic Analysis (BEA) calculates real output for different sectors by dividing nominal output by specific deflators for each sector. As time passes, more projects are accounted for, and the imputation rates decrease. This leads to revised estimates of nominal spending to include these late responses.

The imputation cap can result in underestimating spending, especially when many imputed projects are facing significant cost overruns. An imputed cap is a limit on the amount of imputed data that can be accounted for in an estimation. When data is missing and values are substituted or estimated this is imputed data. This situation becomes more problematic when the denominator used to convert from nominal to real values has increased by 33% in just three years, combined with widespread project delays. These factors indicate a higher risk of a potential slowdown in the future, particularly for the construction sector, which is sensitive to interest rates. It's worth noting that historical revisions may show higher values for the construction sector, while future revisions are likely to reflect lower values as price indices decrease and labor market conditions naturally ease.

The revisions to historical data from the Philadelphia Fed suggest that we are already at a level of downward revisions that are consistent with a recession now. Other metrics, ranging from leading economic indicators to WARN notices (layoff announcements from large firms), Challenger job cuts, etc., suggest the same. The notable exception that we are all forced to acknowledge is the tight labor market. The labor force has changed remarkably in a very short period of time, with the number of workers with college degrees rising by 15MM while the rest of the labor force fell. The proportion of the labor force with a college degree has nearly doubled in the last 30 years. And predictably, unemployment rates for this now well-supplied cohort have begun to rise even as it retreats for those without college degrees.

The segmented Beveridge Curve continues to suggest we are at a tipping point in white-collar workers with college degrees. Job openings for both white and blue-collar (skilled and unskilled with no judgment to be clear) have fallen, but we remain far off levels that will loosen the blue-collar workforce while the white-collar is rapidly approaching the tipping point. This matches with data from the construction market, where the delays and high level of absolute construction suggest an undersupplied labor market. This is quite different from 2008 when employment was running above modeled levels and chased down, and it helps to explain why we have not experienced the declines in construction employment that rGDP reports suggest should have occurred. In contrast, the rapidly falling permits and starts suggest this is about to change.

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