A $445 billion fund manager explains what everyone gets wrong about the economy

Jim McCaughan, CEO of Principal Global Investors, a fund manager with $445 billion in assets, spoke to Business Insider’s Sara Silverstein about what he sees as improper measures of the US economy. Following is a transcript of the video.

Sara Silverstein: When you look at the economic picture right now, what do you think people are missing?

Jim McCaughan: I think they’re missing the impact of technology, and I think it’s being underestimated by a lot of commentators. What I mean by that is the consistent improvement in quality of goods and services is not reflected in the official data. If you think about it, the economy is really growing faster than the GDP numbers suggest, because the improvement in quality has accelerated. It’s always been built into the GDP numbers, but inadequately. I’d also point out on the economy that capital investment is now a lot more productive than it used to be. Technology makes sure of that. Whether it’s the sharing economy that brings assets into productive use, like say Airbnb, or maybe it’s if you have a factory that’s working 24/7 with robots, or as it used to be a shift system with people. So the capital stock is working much harder. All of this means the interest rates are and will stay lower than most people thought. And I think they’re missing this and I think it’s important for valuation of every other asset, including equities.

Silverstein: And just to go back to the improper measures of where we are economically speaking, what do you think — like what percentage are we missing in GDP and inflation? How much are those off by?

McCaughan: Well I suspect inflation may be overstated by about 1% per annum. And the GDP therefore may be understated by about 1% per annum. And, you know, if you want to have a very general understanding of how that works, here’s a question sometimes asked of graduate students in economics — if you took a typical income, say $70,000 a year, would you rather live now or in 1900? And most people will say, “There’s been so much inflation 70,000 years, I’d be rich. I’ll go for 1900.” But then if you really think about it, you wouldn’t have technology, you wouldn’t have antibiotics, routine diseases that are easily cured now would kill you. Life would be pretty uncomfortable — no appliances. How do you keep in contact with people? You can’t travel and see the world. In 1900, even if you are rich, it would be pretty miserable. There’s an example of the very long term of the quality improvement I’m talking about. And I think that continues at a very rapid rate. So I think we’re better off than the numbers say we are and there’s maybe 1% more growth and 1% less inflation than most people think.