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George AthanassakosFred Lum/The Globe and Mail

Statistic after statistic shows that economic growth is stuck in a rut. Month after month, the International Monetary Fund revises down global and U.S. economic growth. Second-quarter 2016 gross domestic product (GDP) growth in the United States and euro zone surprised on the downside. Is this the end of economic growth? Is this the start of muddle-through economics destined to leave millions of people in poverty?

It is hard to believe that this is it. The global economy has managed to survive and grow after world wars, depressions, plagues and so on, and I do not think it is bound to expire now.

I know it is difficult to be optimistic: Brexit, terrorist attacks, economic imbalances, uncontrolled migration, declining population growth, aging demographics – the litany of negative news and developments goes on and on.

But could it be that GDP is no longer a true gauge of economic activity?

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Economic growth in the new millennium is more "asset light" than in previous decades.

As Bloomberg BusinessWeek reports: "Companies such as Uber and Airbnb prosper by exploiting assets that are already in place. Software, which is pure information and doesn't require the construction of factories, accounts for a bigger share of the economy."

Retail businesses beef up their online presence as opposed to building another store.

Management eschews investing in fixed assets and instead invests in soft assets that are not accurately measured by traditional statistics.

Investment in fixed assets is highly correlated with GDP growth – the correlation coefficient for the period 1992 to 2015 was 93 per cent. In other words, as fixed investment goes, so goes the economy.

But what if fixed investment reported and GDP growth do not properly capture a big portion of soft investments? Then the reported numbers severely understate what the true economy is actually doing.

Could a better and more accurate measure of economic activity be the unemployment rate, which captures not only people employed in the Old Economy sectors but also those hired in the soft investment sectors of the economy, but not accounted for in traditional measures?

The number of Americans filing for unemployment benefits has reached 43-year lows. And, with few exceptions, the unemployment rate is as low as one can remember.

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Economic growth over the past 70 years was much higher when the unemployment rate was below 5 per cent as opposed when it was above 5 per cent. But nowadays, even though the unemployment rate is below 5 per cent, economic growth is not even close to what it was historically when the unemployment rate was below 5 per cent.

In the latest quarter, for example, while U.S. consumer spending (which is highly related to the unemployment rate) grew at a healthy 4.2 per cent, business investments contacted and GDP grew by a meagre 1.2 per cent, annualized.

So something is not right.

And what about the U.S. stock market? It is on a tear, reaching new all-time heights weekly.

The stock market is an aggregation of total economic activity by companies operating in all aspects of the economy, both Old and New Economy. The stock market in the United States is priced for accelerated economic activity. Could equity investors be so wrong about economic growth?

It is true that old hands believe the "smart money" is in the bond market, so it is in the bond market where one has to look for signals of economic health and a sense of where the economy is headed. And right now, bond investors expect low inflation and economic growth for years to come. Yet the stock market and the unemployment rate keep giving different signals.

Something else must be going on behind the scenes.

The drop in interest rates and the flattening of the yield curve, which is normally a precursor of recessions, this time may be giving misleading signals.

Developments in the bond market have little to do with the strength of economic growth, but rather are affected by imbalances in demand versus supply of bonds that have skewed short- and long-term interest rates.

In other words, it is not low expectations of economic growth and interest rates down the road that have been determining the shape of the yield curve in recent years. It is rather imbalances in the bond market, where the typical demand for bonds by insurers and pension funds far exceeds the supply of bonds, which has been curtailed by central banks' quantitative easing (when central banks buy bonds in the hopes of stimulating economic growth), a phenomenon that is normally temporary but this time has held for much longer.

If bond investors are wrong and equity investors are right, then inflation may be closer to home in the United States than is thought by pundits who have thrown in the towel and accepted impending deflation.

For example, the producers' price index, the canary in the coal mine, "unexpectedly" jumped a few days ago, recording its biggest gain in a year. Could this be a forerunner of what is coming down the line?

George Athanassakos is a professor of finance and holds the Ben Graham Chair in Value Investing at the Richard Ivey School of Business, University of Western Ontario

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