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My highest-conviction macro idea is that stubbornly low US productivity is finally set to rise over the medium term. Today, we are seeing early signs of improvement as the economy recovers from the lockdown (light blue line in Figure 1), but the question is whether these gains will be sustained and continue to build through the new expansion. I believe they will, and this implies higher potential economic growth, which, coupled with fiscal spending, should gradually push up long-term interest rates in the coming years.
In my last note about this upcoming revival in productivity, I stressed that it will be driven to a great extent by the digital revolution, which is yielding new, more efficient ways of doing business. Since then, we’ve experienced the seismic effects of a pandemic, including creative destruction across many areas of the economy. Businesses, governments, and consumers have been forced to invest in technology, and the resulting connectivity is here to stay. We’re seeing a shift in thinking about remote/hybrid work models, a step-up in online purchase and delivery models, increased appetite for digitalization, and more automation across sectors. Here I’ll touch briefly on several of these trends and related observations that I expect to shape the post-COVID US economic landscape.
The rise of remote work — This could end up being one of the longer-lasting trends out of the pandemic. A recent academic study found that 37% of US jobs can be done from home.1 White-collar jobs in education, professional services, business services, and financial services all score high in their ability to accommodate remote work. To put this shift in perspective, only 3.3% of full-time workers were working remotely in 2018. Of course, this number somewhat understates the reality, since self-employed and part-time workers are more likely to work remotely. Nevertheless, in the new reality of the pandemic, the figure rose to 45% as of June 2020.2 That seems unsustainably high, but, taking the evolving corporate view on remote work into account (Figure 2), I think it could stabilize around 20%.
The decline of big cities — The shift to remote work could correspond to another unfolding development: the decline in the importance of big cities. The pre-COVID median wage differential for the same occupation between the top 15 US metro areas and other metro areas was as much as 40%, while the median house price was almost three times higher in the top metro areas.3 These gaps suggest room for a broader online labor market and the ability to arbitrage “excessive rents.” Savings on commuting, childcare, and housing could translate into more discretionary dollars for consumers. On the flip side, office space could be repurposed (more experiential, less functional), downtown commercial retail space may be altered, and congestion and pollution could be eased in large cities, which will of course still have the lure of amenities that smaller cities and towns can’t offer.
The surge in online purchases — Today, e-commerce accounts for 16% of retail sales, reflecting a steep increase in the second quarter (Figure 3). While some of this may be given back on the other side of the pandemic, the technological investments that companies have already made suggest some stickiness to the online model, as do the cost/time savings, the ease of doing business, and shifting consumer preferences. In the meantime, retail bankruptcies have risen to the highest level since 2010. This troubled sector may finally see some shrinking supply in the coming year at a time when hands-on shoppers are eager to return to stores. This turn in demand the other way could be meaningful but does not detract from the long-term trend toward a more hybrid model.
The shift to online education and health care — These two labor-intensive sectors have experienced a big taste of online usage this year. While distance learning had gained some traction prior to COVID-19, it took a massive leap forward this fall, with as many as two-thirds of college students engaged in some form of online learning.4 A university system that was already facing declining enrollment and the effects of strained state and local budgets seems ripe for reworking its delivery model and cost structure.
On the health care front, the use of telemedicine exploded this past spring when much of the country was in lockdown (Figure 4). More recent data suggests some reduced reliance on telemedicine, but the benefits remain obvious, including time/cost savings and a better model for those needing regular follow ups. The greatest areas of opportunity may include specialties such as behavioral health, neurology, and adult care, as well as underserved rural areas. Achieving more sustained use (and efficiency gains) will require regulatory clarity, simple execution for health care practitioners, and broad acceptance by insurance plans, among other factors.
It’s worth noting that service industries broadly have historically had relatively low levels of productivity. Operational model changes like these, which allow for scaling of labor, could be a reason for optimism on the aggregate numbers.
The move to a cashless society — The pandemic saw cash pick up as a store of value (consumers held higher cash balances), but at the same time about a quarter of consumers moved away from cash toward credit and debit cards, making online or phone purchases rather than payments in store during the worst period of the lockdown.5 The contactless convenience may finally move the needle on small-ticket items, which is where cash has continued to hold sway. Here too, regulatory policy will play a key role in determining the process of change.
Finally, it is worth highlighting a curious phenomenon of this recession: the presence of skilled labor shortages. As companies adopt technology and consider future labor needs, we are witnessing an evolution in the skills that are valued in the labor force. Figure 1 (dark blue line) shows that many companies are struggling to find qualified workers for open positions. This is true not just in technological areas but also in industries such as construction. My belief remains that the recovery in the labor market post COVID will be faster than what was experienced post GFC. This in turn has important policy implications, including the possibility that the Fed will change direction on interest rates more quickly than currently believed. The shift in skills should also encourage skills training and boost educational attainment in coming years.
The bottom line
Digitalization is still uneven across the economy, and the ability of small businesses to adopt many of these innovations will be crucial if sectors are to reach the critical threshold for productivity gains. But overall, these findings provide further support for my case that growth will be better in the next expansion.
1Source: “How Many Jobs Can Be Done at Home?”, Jonathan Dingel and Brent Neiman, National Bureau of Economic Research, June 2020
2Source: “How Working from Home Works Out,” Nicholas Bloom, Stanford Institute for Economic Policy Research, June 2020
3Source: “When Work Goes Remote,” Upwork, July 2020
4Source: The Chronicle of Higher Education, 1 October 2020
5Source: Cash Product Office, Federal Reserve System, July 2020
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