As the pandemic recedes and mass vaccinations proceed, the U.S. economy appears due for a record-breaking year of job growth. With Democrats promising an extra $1,400 stimulus check and massive infrastructure spending, economists have been slicing their year-end unemployment forecasts — some to 4.5% or lower. That level took a decade to get back to after the financial crisis.
Yet Covid’s imprint on the U.S. economy and labor market will be lasting. All the pandemic’s changes in how people do things — the shift to online grocery shopping and working from home — and how businesses have adjusted to threats and opportunities have major implications for the economic cycle.
As tech-savvy giants such as Walmart (WMT), Amazon.com (AMZN), General Motors (GM) and McDonald’s (MCD) lead an investment boom to capitalize on trends accelerated by the coronavirus, productivity growth is likely to continue its post-lockdown resurgence. That could help tame a coming rebound in inflation and limit the need for much Federal Reserve tightening. Yet there’s a risk that the K-shaped U.S. economic recovery — in which low-income workers struggle as the rich get richer — could linger as the clock ticks down on some essential jobs added during the pandemic.
Like Rosie the Riveter in World War II, the exploding ranks of Instacart shoppers have played a critical role. Yet high demand for their fundamentally low-tech work has helped launch an era of technology-led job disruption. Huge corporations are accelerating robotics investment to turn pandemic-era market-share gains into profits. The need for speedy service and social distance has only bolstered the attractiveness of automation for businesses and consumers. That has sealed the case for rapid deployment of labor-saving technologies. Meanwhile, R&D investment is surging as tech giants, startups and big automakers gear up for a faster shift to EVs and a race to deliver self-driving cars.
‘Pandemic Rules’ Give Companies ‘Cover’
Automating major sectors of the $21 trillion U.S. economy will be a marathon, not a sprint. Major technological challenges remain to be solved. But companies now playing by “pandemic rules” have turned up the dial on the era of Amazon-led disruption that preceded it.
“Businesses across industries have taken advantage of the pandemic to more fully deploy technologies and process changes that they were investing in but reluctant to take full advantage of during the good times,” wrote Mark Zandi, chief economist at Moody’s Analytics. “They knew those changes would entail difficulty for their labor forces. The pandemic has effectively given businesses cover to make these wrenching changes.”
By the end of the decade, a tech-driven productivity boom could imperil 17 million mostly low-wage positions — about 25% more than would have succumbed to automation if not for Covid, McKinsey estimates. One of the key policy challenges for the decade ahead will be to make sure those displaced workers can fill the high-paying jobs that replace them.
U.S. Economy Job Shift
A few numbers help illustrate the dramatic shift in the U.S. economy. The number of employed Americans remains 8.7 million off the pre-Covid peak, according to the Labor Department’s household survey. Yet employers report that payroll jobs are still down 9.9 million from February 2020. That 1.2 million gap hints at the explosion in gig-economy workers.
More than one million “Dashers” made deliveries in Q4 for online takeout service DoorDash, whose orders more than tripled from a year ago to a 1.1 billion annual pace. Shopping app Instacart more than doubled its workforce by hiring 300,000 grocery shoppers in the early weeks of the pandemic, then set about adding another quarter million.
Online Grocery Shopping Surges
In early 2020, Cowen predicted that online grocery shopping could double to reach 10% of sales by 2024. But that happened within weeks, as the industry pulled out all the stops to meet a Covid-driven spike in demand.
Walmart hired more than half a million workers in 2020. Amazon employment surged by 500,000, or 63%, to 1.3 million. Amazon’s North America physical footprint grew by 50%, or 100 million square feet. New outlays on property and equipment ballooned 70% to $44 billion.
Overall U.S. e-commerce sales surged 44% to $861 billion last year, Digital Commerce 360 says. The 5.3-percentage-point jump to 21.3% of total retail sales (excluding a few categories like gas and autos) exceeded cumulative growth over the prior four years.
Productivity Push For Profits
But even for a huge, high-productivity operator like Walmart, surging online revenue hasn’t yet added up to profits. That’s why 2020’s e-commerce turbo boost may prove so transformative beyond the pandemic.
The Covid-related surge in online sales “presents an opportunity, but also a challenge to the grocery sector given how dilutive e-commerce is to an already low-margin business,” wrote Morgan Stanley analyst Simeon Gutman in a Jan. 28 report.
Walmart and the rest of the retail sector can’t afford to skimp on convenience, not when Amazon is breathing down their necks. That means the acceleration in e-commerce has only hastened the imperative to drive down the cost of preparing online orders for free pickup or last-mile delivery.
“In a post-Covid world of higher online penetration, improving the margin profile of online grocery through lowering the cost of fulfillment is critical,” Gutman wrote.
Automating Online Grocery Orders
Back in January 2020, just ahead of the pandemic, Walmart announced its first live test of an automated micro fulfillment center connected to a store in Salem, N.H. Now it’s going all out to build “over 100 of these within the next couple of years,” with each able to serve multiple communities, President John Furner said on the Q4 earnings call on Feb. 18.
Automated fulfillment can get the bulk of online grocery orders ready in just a few minutes, as a Walmart associate collects fresh items like produce and meat. Meanwhile, Walmart will begin adding automated pickup points at some stores. That will let customers drive up, scan a code and grab their own groceries.
Distribution centers are also set for a big automation push.
Walmart expects $14 billion in capital spending this year, up from $10.3 billion in fiscal 2020, as it cuts shipping time and costs.
“Our automation plan is now ready to scale,” CEO Doug McMillon said on the Feb. 18 call.
Manufacturing Steps Up Automation
The manufacturing sector was still getting over the China trade war when Covid once again upended global supply chains.
While the recovery has been swift, Covid’s imprint on the sector will be indelible.
After crashing 20% in April, factory output recovered to just 1% below year-ago levels by January. Yet manufacturing production workers still clocked 4.6% fewer hours than a year before. The upshot: Factories have learned how to get more out of fewer workers.
A BDO survey of manufacturing CFOs conducted in September found that 40% planned to automate manual labor in the coming year, while 22% planned to re-shore production to the U.S.
Tyson Foods (TSN) opened a manufacturing automation center in August to develop robot butchers after Covid wracked the meat processing industry, where workers tend to have little distance between them.
Teradyne (TER) said in a Jan. 28 earnings call that it expects its robotics units to grow more than 30% this year. “We are well-positioned to capitalize on a world emerging to invest even more in automation to improve resilience and productivity,” CEO Mark Jagiela said.
Contactless Check-In And Checkout
For a wide range of consumer-facing businesses, Covid restrictions, disruptions and revenue loss sparked a reassessment of costs via a social distancing lens.
Marriott (MAR) said with its Q3 earnings report that it had reduced the break-even occupancy rate by three to five percentage points “by increasingly leveraging contactless technologies such as mobile and web check-in, mobile key, and mobile chat.”
Robotic scrubbers guided by Brain Corp.’s AI software platform soared more than 300% in 2020 to 14,500. Walmart division Sam’s Club added the robots to each of its stores.
“Faster Checkout. Limited Contact,” reads the sign at an Ohio store where Kroger (KR) recently introduced KroGo shopping carts equipped with a scanner and scale, enabling customers to avoid the checkout line. That followed Amazon’s Dash Cart, which automatically scans groceries at Amazon Fresh outlets. The Fresh store concept, which debuted in August, recently expanded to an eighth store. Another dozen sites are in the works, and their number could multiply.
While pushing marginal competitors close to the edge, if not into bankruptcy, the pandemic has given Amazon and other financially solid, technologically adept firms an opportunity to press their advantage as the U.S. economy begins to recover.
McDonald’s last November announced a full menu of initiatives to double down on the Covid ideal of fast, contactless service. They include voice-activated drive-thru ordering; a drive-thru express lane to retrieve orders placed via app, possibly from a conveyor belt; and a seatless, on-the-go restaurant format.
U.S. Economy: Higher Pay, Fewer Jobs?
No retail transformation has been more dramatic than that of Best Buy, which saw online sales more than double to 43% of the total in 2020. In August, the electronics and appliance retailer said it would turn 250 of its 1,000 stores into e-commerce hubs, offering same-day delivery for orders placed by 1 p.m. and next-day for orders placed by 8 p.m.
As more workers shifted to fulfilling the work-from-home surge in orders, Best Buy hiked its minimum wage to $15 an hour. Yet its evolving model still saved on labor costs, as Best Buy shed 17% of its workforce.
Now, even as the pandemic may be winding down, there is no turning back the clock on productivity gains. On Thursday’s Q4 earnings call, Best Buy said it had cut 5,000 mostly full-time workers, while hiring 2,000 part-timers. The company also said it would close more than 20 stores in the coming year. Best Buy also is reportedly testing a model that shrinks retail space by about 45% and devotes that area to prepping online orders.
Best Buy’s strategic moves highlight the importance of logistics near the end consumer, enabling same-day delivery. But real estate investment trust Prologis (PLD) sees e-commerce growth contributing to a supply crunch, with a shortfall of 50 million to 140 million square feet per year in logistics space. That’s only likely to provide more fuel for automation. Prologis notes that fixed automation can increase space efficiencies by up to 50%.
Self-Driving Cars, Robots Target Online Delivery
Meanwhile, the rapidly rising stakes in lowering last-mile delivery costs have intensified efforts to deploy delivery robots, drones and unmanned delivery vehicles. GM’s Cruise self-driving division is doing pilot deliveries for Walmart in Arizona and eyeing the launch of a robotaxi service. Cruise vehicles covered 200,000 miles in California in the fourth quarter without the safety driver once having to take control.
General Motors CEO Mary Barra stopped short of setting a date for Cruise’s commercial launch on the Feb. 10 earnings call but insisted it’s “not years away like people think.” Google (GOOGL) unit Waymo, Apple (AAPL), Tesla (TSLA) and Amazon, which acquired self-driving startup Zoox last June, are among the big-pocketed tech giants all vying for a share of the multitrillion-dollar market.
Although highway driving is less complex, autonomous trucks appear unlikely to arrive in significant numbers until the second half of the decade. Yet the stakes are high, with an estimated 1.8 million long-haul truck drivers.
Delivery bots, which travel at much slower speeds and carry goods, are already making big strides. The six-wheeled Starship robot made its one millionth delivery last month. That took six years. But Starship expects the next million in “a matter of months,” as it expands on college campuses. Meanwhile, Amazon is testing its Scout delivery bot in a few markets. The FedEx (FDX) Roxo bot, which is able to climb front steps, is testing delivery of pizza, groceries and other merchandise within a three- to five-mile range of retailers.
FedEx is also testing electronic pallets by GM’s Brightdrop unit to ferry up to 200 pounds in packages down the sidewalk. An initial test boosted package deliveries by 25%.
EVs Require Fewer Auto Workers
The EV investment boom has only picked up steam since Joe Biden’s Nov. 3 election victory. Barely two weeks after Election Day, GM said it would plow an additional $7 billion into EVs by 2025. Last month, GM said it aims to phase out gas-powered cars by 2035.
That’s probably no coincidence. President Biden intends to build 500,000 EV charging stations and transition the federal fleet of 645,000 vehicles to zero emissions. Tax incentives for EV purchases also are likely to grow under Democrats.
Yet the accelerated shift to EVs also has implications for productivity growth and jobs. Ford (F) has estimated that EV assembly requires 30% fewer labor hours than gas-powered vehicles. Fewer parts should mean fewer repairs, and EV owners won’t need to go to the dealer for an oil change. Those latter factors may partly explain why 20% of Cadillac dealers opted to take GM buyouts rather than invest $200,000 upfront in their EV future.
U.S. Economy Shifts And Minimum Wage
Other Biden agenda items may have a significant impact on the labor market and the U.S. economic recovery. Biden’s push for a $15 minimum wage by 2025 may fall short. But some Republicans said they might engage on a more moderate hike to $10.
One big wild card is whether the Biden administration tries to rein in gig-economy employers like Instacart and DoorDash. They dodged a bullet in November when California voters approved a narrow set of rights for gig workers. If the Labor Department rules that Instacart shoppers are employees, not contract workers, that could blow up the already difficult online grocery economics, except via automation.
With $1.9 trillion in fiscal stimulus almost out the door and Covid on the wane, the job market is about to take off. But it might not feel like much of a boom after the initial bump from stimulus checks, says investment banker Daniel Alpert, who helped develop the Job Quality Index tracked by Cornell.
To the extent that modest-wage, customer-facing jobs come back amid productivity gains, “there’s a zero-dollar economic benefit,” Alpert says. He notes that wages will merely replace expanded unemployment checks. However, Alpert thinks an infrastructure plan like Biden campaigned on — $2 trillion over four years — could go a long way to healing the job market.
U.S. Economic Transformation: Too Few Low-Wage Jobs?
Even still, Covid’s imprint on the U.S. economy will likely endure. Before the pandemic, David Autor and Elisabeth Reynolds of the MIT Task Force on the Work of the Future, anticipated automation easing a shortage of workers. Yet, in looking to the post-Covid U.S. economy last July, they foresaw too few low-wage jobs.
One big worry is that “telepresence displaces a meaningful fraction of professional office time and business travel,” Autor and Reynolds wrote in a report. That could mean “steep declines in demand for building cleaning, security, and maintenance service; hotel workers and restaurant staff; taxi and ride-hailing drivers; and myriad other workers who feed, transport, clothe, entertain, and shelter people when they are not in their own homes.”
Bronx County has seen its unemployment rate soar by 10 percentage points over the past year, tied for worst in the country, as high-income workers skip the commute to New York City.
Such services make up a large and growing share of jobs for workers without postsecondary degrees, Autor and Reynolds note. That will compound Covid’s hit to retail, push to automate and assist to large-firm dominance.
The crisis accelerated longer-run trends, “hastening both the accompanying productivity gains and the inevitable labor market adjustments.”
The High-Wage Economy
A new McKinsey report on the future of work highlights the massive need for worker retraining for the U.S. economy.
“Because of the pandemic’s impact on low-wage jobs, we now estimate that almost all growth in labor demand will occur in high-wage jobs,” the McKinsey report warns. “Going forward, more than half of displaced low-wage workers may need to shift to occupations in higher wage brackets and require different skills to remain employed.”
For the U.S. economy, McKinsey estimates that more than 17 million workers will need to find new jobs by 2030. Lasting change from the pandemic adds nearly 4 million to the total.
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