Year to year GDP growth volatility for America has dropped from 3.5% in the early 80’s to .5% today in a slow steady progression. What this means is that back then you couldn’t predict from one year to the next very much about how fast the economy would grow. Back then, recessions were harder and booms were boomier.

Today things are more stable. Economists call this the “Great Moderation”. That this Great Moderation has occurred at this point is relatively undeniable. But why has the economy gotten less bumpy? What changed?

A recent article in “The Economist” magazine (9/22 p. 35 – The Turning Point) summarizes reams of academic literature to deliver 3 causes:

Economic growth has become less volatile because:

1. Larger more flexible more diverse credit markets

2. Smarter central banks – the fed has gotten much better at keeping inflation down.

Alan Greenspan recently argued that he wasn’t smart at all - just lucky - that his job was made much easier over the last 20 years by the globalization that was accelerated by the fall of the Berlin wall – half the globe got thrown into the free market economy and this has helped keep a lid on wage pressures even in the face of rapid economic growth and low unemployment in America.

3. The third reason is the one that got my attention and is relevant I think to our discussion here today - improvements in managing inventory born of supply chain management software and the abilities of companies like Fedex (one of my customers) and UPS.

That last one blew me away I have to say. To think that something as mundane as supply chain management software could make the world’s economy safer for billions of people seems to me to be quite a stretch. How is this possible?

50 years ago warehouses were full of inventory that represented a huge capital investment and slight changes in consumer demand could have large effects on the economy. Inventory levels were once much larger relative to the size of the economy and small changes in demand could blow up into recession.

Thanks to improvements in technology, firms now have better market intelligence on customer demand and they now produce things in smaller batches – sometimes batches of one – and this allows them to match production to demand very precisely.

Some companies like Dell in my hometown of Austin Texas have no inventory at all other than that which is currently in transit via Fedex or UPS.

And this sort of business is literally saving the world. We software people have other tricks up our sleeve. Watch this space.

Curt runs a timesheet software company in Texas and has a new book out.