To a large extent, arguments that the U.S. has entered a new era of noninflationary robust growth have relied on the idea that the computer revolution is somehow transforming the economy the way earlier technological breakthroughs did. Economist L. Douglas Lee of HSBC Washington Analysis points out, however, that it is not the widespread use of computers, but rather the rising output of computer makers themselves that has produced much of the economy's recent spate of fast-paced inflation-free growth.
The chart underscores the story. In recent years, computer production and consumption alone have added about 1 to 1.5 percentage points to economic growth. As Lee notes, though, that's not because spending on computers has outpaced other outlays. Rather, it's mainly because computers are being sold with more power and features, which statisticians measuring gross domestic product translate into falling prices and more computer output.
The critical point, says Lee, is that the technological advances being embedded in computers add to GDP but place no extra strains on productive capacity. The same people, factories, and raw materials can be used to produce each new generation of computers. So those who want to calculate whether the economy is surpassing its inflationary speed limit would do well to separate the contribution of the computer sector from the rest of the economy.
Such an exercise is revealing. Lee finds that much of the recent surge in industrial productivity is related to the technologically enhanced output of computer industry workers. More important, subtracting the impact of falling computer prices from national output, he finds that the economy has grown at a 2% to 2.5% annual pace in recent years--close to, but not above, its long-term trend.
From this perspective, the lesson for market observers and monetary policymakers is clear: As long as the economy's high growth rates are tied directly to the computer sector itself, says Lee, the Federal Reserve should temper any inclination to step down hard on the monetary brakes.