Immigration could also help to sustain new business formation and productivity. Historically, immigration has led to greater productivity over time, in part because immigrants tend to start companies at a higher rate than the native population, Zandi says.
While demand for workers has cooled in some parts of the economy, small businesses are still hiring. About 56% of small-business owners reported that they hired or tried to hire workers in March, the same percentage as in February, according to data from the National Federation of Independent Business.
Skilled workers remain in demand. Four in 10 private companies surveyed by Deloitte in February 2024 said their top strategy to boost productivity is to hire qualified or skilled talent.
"Businesses are waking up to some of the demographic challenges that we have, and they're thinking about labor a little bit differently," says Wells Fargo's House, noting that many employers now value workers more than they did before the Covid pandemic.
That could help to cushion the labor market from some of the negative effects of higher interest rates and quell employers' impulse to cut workers if the market turns down. Limiting layoffs would also bolster consumers' finances and spur spending. Total retail sales jumped 0.7% in March, while the data for February were revised higher.
Last year's boom in consumer spending, which accounts for about 70% of economic activity, helped lift gross domestic product by 2.5%, adjusted for inflation. Demand remains fairly healthy, although consumers are pulling back from the pandemic-era glut, based on the latest GDP report, which came in well below consensus expectations. The report is the first of three GDP estimates, and is based on data subject to revisions.
Des Moines, Iowa--based business owner Mike Draper has been a beneficiary of the growth in consumer spending. Draper opened the first of his Raygun printing, design, and clothing stores in 2005 and has since expanded to nine stores and a production facility, with a tenth store opening this summer.
"The hardest thing about the economy during the past two years was hearing people worry about the economy," Draper says, adding that recession predictions don't square with what he's seeing. While spending patterns have become a bit less predictable, he says, he hasn't seen consumers pulling back yet.
The pandemic forced Raygun to "speed up content release," says Draper, who is optimistic about the outlook for the company and the economy.
"America is just on this unbelievable winning streak that started with inventing a vaccine, and it has gone on from there," he says. "I can't wrap my head around what people are so bummed out about."
Reasons for Optimism
The U.S. probably has wrung out by now the majority of the productivity gains from pandemic-era business upgrades and workforce dynamics. But that needn't be the end of the story. Continued public and private investment could provide tailwinds, especially when paired with emerging technologies such as generative artificial intelligence.
Government-funded research and development in nondefense sectors historically has improved productivity, and recent legislation, including the Chips Act and the Inflation Reduction Act, probably will help to boost U.S. productivity in the medium and long term, says Andrew Fieldhouse, an economics professor at the Mays Business School at Texas A&M University.
Fieldhouse's research shows that the effects of government R&D boost productivity for eight to 15 years after an increase in appropriations. In the past two fiscal years that ended on Sept. 30, Congress hasn't come close to appropriating the full amount authorized by Chips. That legislation could have an impact on productivity growth for at least the next five to 10 years, he figures.
Additionally, real manufacturing-construction spending doubled from 2022 to early 2023, coinciding with healthy growth in private, nonresidential fixed investment. "All of this should be giving workers more factories and more equipment to work with, boosting labor productivity," Fieldhouse says.
Innovation holds even greater potential for increasing U.S. labor productivity. Goldman Sachs projects that the impact of AI could boost GDP growth by up to 2.3% by 2034, although adoption of the technology is still in its infancy.
Only about 3.9% of businesses nationwide have used AI -- including machine learning, natural language processing, virtual agents, and voice recognition -- to produce goods or services, according to the Census Bureau's November 2023 Business Trends and Outlook Survey. Still, about 87% of private businesses recently surveyed by Deloitte expect AI to deliver increases in their labor productivity in the next three years.
Other recent innovations also could improve productivity, including mRNA vaccines, green transition technologies, cloud computing, robotics, and even advances in material science. "We can get myopically focused on generative AI, but it surely shouldn't be the only technology that's boosting productivity in the future," says McKinsey's White.
It is unclear how transformative or ubiquitous any of these advances will be, and estimates of their potential impact vary. Nor is it reasonable to expect that productivity will grow in a linear fashion, increasing in every quarter. But just as the U.S. economy's strength has stunned almost everyone, from economists and policymakers to investors, productivity could prove surprisingly robust in the years ahead.
Write to Megan Leonhardt at megan.leonhardt@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
April 26, 2024 16:12 ET (20:12 GMT)
Copyright (c) 2024 Dow Jones & Company, Inc.
Comments