Numbers Can’t Contain an Idea-Driven Economy

With a nervousness typical of the times, economists and investment experts last week feared the economy was having a heart attack.

But a more accurate diagnosis was that the economy slowed to catch its breath and to work off fatty inventory. The national economy is not slipping into recession; the California economy is not going back to the bad old days of the early ‘90s.

All the fuss was about a 4% fall in orders for business equipment along with another drop in home sales. Economic growth has probably slowed to less than 2.5% this quarter, from rapid growth of more than 4% last year. But that’s not a problem; 2.5% is a sustainable running level for the economy, and growth at 2.5% to 3% is expected to continue right through 1996.

However, when skies suddenly turn cloudy--with stalled or falling house prices--it affects people. Consumers turn cautious, worrying about credit card bills and job security. Stock markets become fearful that company profits won’t fulfill expectations.

But a couple of employment forecasts last week, by the Financial Executives Institute and Manpower Inc., reported increased hiring plans for this year’s second half. As to the stock market, it may retreat from peak levels this summer, but the big threat to stock prices is not domestic. Rather, experts fear a seize-up in Japan’s still inflated stock market that could ripple through financial markets worldwide.

But don’t get lost in numbers or vague anxieties if you want to understand the U.S. economy right now.

The long-term pattern of greater output and efficiency--productivity, in a word--through increased use of and innovation in computing and communications remains intact. “We are in the greatest capital equipment boom in history,” says economist Stephen Roach of Morgan Stanley.

What is now half a decade of heavy business investment in technology has done more than cut costs and increased profitability. It has opened possibilities.

For something to hang your hat on, simply note that Hughes’ DirecTv satellite system has attracted 600,000 subscribers in its first year, more than videocassette recorders and compact disc players--which sold 35,000 each in their first years--or any other innovation in five decades.

RCA-Thomson has just shipped to dealers the millionth satellite dish for the Hughes system. And now Sony and other manufacturers can go into production, promising to bring down the $700-plus price of the dish and related equipment.

Something’s going on here. The satellite system is not even perfected yet--it can’t get local stations; sports programs cost extra. But Hughes expects that five years from now, it will have 10 million subscribers and a new business with annual revenue of $3 billion to $4 billion.

The economics are impressive. Hughes Electronics, a wholly owned subsidiary of General Motors, has always made communications satellites for the Defense Department and for commercial customers. Therefore, it has decades of investment and acquired knowledge in satellites. Its new DirecTv business , which it is now extending to Latin America and Asia, didn’t require massive investment. All it required was an idea and the willingness to pursue it.

*

But the economics of ideas are almost incalculable. Think back to the VCR. It spawned first the mom-and-pop video rental stores and then the giant Blockbuster chain, whose founder, H. Wayne Huizenga, dreams of building a new tourist complex in Florida, a state that increasingly attracts tourists from Europe because deregulated air fares are low and the U.S. tourism industry has become an efficient caterer to global travelers.

The purpose of adding up such a daisy chain is not mere whimsy. Rather, it illustrates a new way of thinking about ideas and technologies and their effects on the economy.

An economy such as ours, which has always developed new ways of growing crops or producing goods or transporting people and information, runs on ideas as much as objects, says Paul Romer, a 39-year-old economist at UC Berkeley who is recognized as developing a new discipline to analyze the impact of technology.

Ideas are not accidental to the economy, “like manna from heaven,” Romer says in an interview in the Forbes ASAP technology supplement. Rather, they grow out of accumulated investment and knowledge and willingness to try new approaches--as Hughes did with satellite TV.

Now, to come down to earth from such high concepts, we should note that conventional statistics have not captured the changes occurring this decade in the U.S. economy. The growth of productivity was diagnosed for a long time as a jobless recovery. Whole volumes were devoted to gloomy predictions on this strange economy.

But new analysis by Daniel Mitchell of UCLA’s Anderson School of Management finds that both jobs and wages have grown along with efficiency in recent years. The economy wasn’t really strange, but statistical understanding of it was flawed.

Similarly, one or two statistics fail to capture underlying strengths in today’s economy--the fact that corporations and the banking system are flush with cash, that inflation is low and so are interest rates.

*

Even the U.S. stock market, with the average company in the Standard & Poor’s 500-stock index selling at 17 times last year’s earnings, is not wildly overpriced--certainly not in contrast with Japan’s market, where companies still sell at 75 times earnings.

As for house prices not going up, well that has more to do with the age of the population than the pace of business.

The bottom line is that after a pause to work off inventory, the economy will probably resume a sustainable growth of about 2.8% right through 1996. But don’t get lost in numbers; rather, try to keep an eye on the flow of new ideas. That’s what really makes the economy go.