Revised GDP data for 1Q23 shows continued growth in knowledge-related business investment

This morning the BEA released its “Second Estimate” of the GDP in the first quarter of 2023 (1Q 2023). The updated data shows that the economy grew slightly faster (1.3%) than earlier reported (1.1%). The revised data shows some changes to knowledge-related business investment. Investment in R&D was revised downward slightly while investment in information processing equipment and software were revised upward.

This revision reverses the earlier view on information processing equipment, which was shown as declining. The revised data shows growth in the 1Q23 was ever so small. But, that investment in information processing equipment grew at all is welcome news. And, even with the downward revision in R&D investment, that investment also continued to grow.

[Note: I define knowledge-related investment as the combination of investment in Information Processing Equipment, R&D, and Software. The first of these three categories is reported in the GDP data as a subcategory of Non-residential Fixed Investment: Equipment. The latter two are reported as subcategories of Non-residential Fixed Investment: Intellectual Property Products.]

More on the future of remote work

In reading a recent interview and a lecture by Nick Bloom, I came across a couple of new insights on remote work (at least new to me): offshoring, office space, and labor force participation.

[The interview was with Flex Index and the lecture was Bloom’s address to the UK Institute for Fiscal Studies.]

To understand work-from-home (WFH), we need to look carefully at the type of jobs that full remote workers are doing. In many cases, they seem to be the back-office tasks (IT, HR, Finance). The number of jobs being done fully remotely increased drastically during the pandemic. Some of this growth was US workers moving from the office to WFH—with some of these workers resisting calls to return to the office. But it is possible that some of these jobs have been outsourced or offshored. Bloom reminds us that if the job can be done remotely, it can be moved to almost anywhere in the world. He is hearing more CEOs thinking about this possibility and increasingly looking to tap into this global labor force. Bloom also reminds us that fully remote jobs may be more likely to be replaced by AI.

Bloom also notes that the number of fully remote jobs peaked at around 20% of the workforce and is now down to about 10%. I see this as a function of “learning-by-doing.” As companies and workers are gaining familiarity with (and COVID restrictions were lifted), some of those fully remote switched to a hybrid in-person/WFH model. While there has been some movement from fully remote back to the office full time, the data shows a rise of hybrid as fully remote declines. For those jobs that require little interaction with colleagues, I suspect many will remain remote. There is a dynamic that will keep some part of the workforce working remotely. Fully remote work is less productive but lowers cost because of less office space and the ability to tap into lower worker wages at lower cost locations (either in the US or abroad).

The second point concerns office space. Bloom notes that even before the pandemic a lot of office space was underutilized. For companies using a structured hybrid model where everyone is required to be in the office on certain days, such as Tuesday through Thursday, Bloom notes that there will not be any space savings. As he notes, and I have pointed out, everyone will still need office space.

But the nature of that space may be different. For example, in his interview, Bloom speculates offices may be smaller. Companies will have to become clever at design and allocation of space. [See the backup slides in his presentation for some examples.] In the IFS lecture, he notes that while office space peaks on Wednesday, leisure type activities have gone from peak activity levels on the weekends to being spread out throughout the day. Whereas office space has gone from being used all week to being packed at a few times during the week. I referred this as the “long weekend” scenario. If you want to see what a downtown will look like on Friday, take a look at what it looked like on a pre-pandemic Saturday.

Bloom, in his IFS lecture, touched on another aspect of the hybrid model. The hybrid model allows more workers to participate, especially part-time worker. Having a hybrid schedule may make working part-time feasible and more attractive to those who could not, for various reasons, work a full-time schedule. The result will be an opening up of the labor force with a possible increase of 1%-2% in the labor supply. Bloom speculated that this may be one of the biggest boosts to economic growth.

Of AI and horses and riders

Martin Wolf’s recent article in the Financial Times on the threat (and promise) of automation starts out with an analogy (maybe more of a metaphor): are humans becoming as obsolete as the horse? Horses are no longer a major part of the economy, having been displaced by technology. Will humans suffer the same fate?

This is not the first time this metaphor was used. Back in 2015, Erik Brynjolfsson and Andrew McAfee did the same in a Foreign Affairs article provocatively entitled “Will Humans Go the Way of Horses?”

As I noted back then (and Wolf notes in his article), horses have not disappeared. They have transformed from a work animal to a recreational role. I would note also that other “obsolete” technologies have made the same transformation, such as wind powered ships aka sailing. And as I mussed in my earlier posting, I suspect that with the improvements in self-driving cars, driving a car will eventually become mostly a recreational activity.

Does this mean that we will approach Keynes’ vision of an age of leisure and abundance, as described in his essay “Economic Possibilities for our Grandchildren”? Probably not. Keynes was describing a point at which people are so wealthy that they need not work anymore. He argues that technical improvements and capital accumulation will solve the “economic problem,” which he defines as the struggle for subsistence.

Economic history has shown that such a point is unlikely. There is the distributional issue. Society in aggregate may be wealthy, but that does not mean everyone is. There is the production issue. Keynes never describes how wealth equates to output. And finally, there is the issue of human nature. We humans have a tendency to want more—well beyond the level of subsistence. Keynes recognized the importance of work in defining one’s self. Keynes’ notion of a 3-hour workday was to give people something to do—not because the work was needed. And he has mixed feelings about the importance of excess accumulation for our sense of self.

Coming back to horses, I would venture to say that many would be thrilled at the prospect of “going the way of the horse,” that is becoming creatures of leisure rather than factors of production. But humans are not horses. Humans have a complex bundle of needs and wants that goes well beyond subsistence. I do not mean this to ignore equine intelligence, including equine emotional intelligence. It is just to note that creating and operate a human socio-economic system that meets those human needs is very difficult.

Humans also have agency over their lives; horses do not. Thus, humans can make decisions about the course of their lives and intervene to implement those decisions. More than the economic argument, Keynes’ essay was really about that fundamental philosophical question of how to live our lives:

“Thus for the first time since his creation man will be faced with his real, permanent problem—how to use his freedom from pressing economic cares, how to occupy the leisure which science and compound interest will have won for him, to live wisely and agreeably and well.”

Keynes was optimistically guarded about this happening. On the one hand, based on what he saw as the advanced guard in this new era, the future was not bright: “To judge from the behavior and the achievements of the wealthy classes to-day [1932] in any quarter of the world, the outlook is very depressing!”

But he remained, somewhat surprisingly, hopeful:

“I feel sure that with a little more experience we shall use the new-found bounty of nature quite differently from the way in which the rich use it to-day, and will map out for ourselves a plan of life quite otherwise than theirs.”

That “little more experience” turned out to be a continuing Great Depression, the devastation of WWII, and the horror of the Holocaust.

Of course, the past century or so has seen a remarkable improvement in the material well-being of humankind. But we have not seen anything like Keynes’ “different plan” (the “counter-culture” notwithstanding). Nor are we likely to. As Brad DeLong points out in Slouching Towards Utopia,

“We do not use our wealth to overmaster our wants. Rather, our wants use our wealth to continues to overmaster us. And this hedonic treadmill is one powerful reason why, even when all went very well, we only slouched rather than galloped toward utopia.

Nevertheless, getting off the treadmill looks grim. Only a fool would wittingly or ignorantly slouch or gallop backwards to near-universal dire global poverty.”

I bring up this abbreviated discussion of the fate of humankind to show how the analogy/metaphor of horses and humans breaks down. Humans aren’t necessarily “going the way” of anything other than the way of humans. The fate of horses can tell us only very little about the fate of humankind. But a reorientation of the metaphor might.

Rather than think of horses and humans as parallel, let us go back to the relationship between the two: horse and rider. A good horseperson will tell you that the relationship is symbiotic. The rider is ultimately in control but the horse has a mind of its own as well. Anyone first-time greenhorn rider on a trail horse can attest to that. The relationship works when horse and rider act as one.

Compare that with the car and driver. Yes, the driver will tell you about working with car—which is mainly understanding and utilizing the car’s quirks and peculiarities. But no driver has had to deal with a car not wanting to go where the driver steers it (unlike a rider persuading a horse at full gallop to jump over a fence).

So maybe we should be thinking of automation and AI as more like a horse than a car. AI is a tool to be worked with like a horse. The horse and the rider each bring something to the relationship. And that relationship depends on the task. With this thought in mind, let us revisit the difference between labor-substituting automation and labor-augmenting innovation. Sometime you (the rider) are interested in a galloping with the winds as horse and rider work as one (labor-augmenting). Other times you are just interested (my riding experience) in getting out and seeing the scenery where a car can’t go without having to walk (labor-substituting).

I realize that this metaphor may be a little stretched. But the point remains: AI and automation are both labor-substituting and labor-augmenting. Which is which depends on both the nature of the task and the decision of the human agents involved. Our public policy needs to be able to deal with nuance rather than assume technology is one or the other. Or force a technology into one category or the other. I’m not sure our policy making has reach this level of sophistication (or if it even can).

Such may be the fate of humankind.

April data on employment in Intangibles – and revisions to previous months

Strong job growth in April with employment growth in intangible-producing industries slightly higher than in tangible-producing industries. February and March growth revised significantly downward.

This morning the Bureau of Labor Statistics reports continued strong employment growth in April. Nonfarm payrolls grew by 253,000 jobs—higher than expected—with the unemployment rate ticking down to 3.4%. The growth in the intangible-producing industries was slightly higher than in the tangible-producing industries. Growth in the tangible-producing industries was led by Accommodation & Food Service (up 25,000 jobs) and Manufacturing (up 22,000 jobs). In intangible-producing industries, Educational & Health Services (excluding tangible services) grew by 65,800 jobs, Professional & Business Services (excluding tangible services) was up 31,000, Financial Activities grew by 23,000 and Government (excluding Postal Service) was up 21,700.

This month’s BLS release also includes revision to the February and March data based on additional information. Importantly, that revisions show growth in February and March was significantly weaker that earlier estimated. February’s growth in employment was revised down by 78,000, from an increase of 326,000 to an increase of 248,000. March’s increase was revised down by 71,000, from an increase of 236,000 to an increase of only 165,000.

The revisions were mostly to intangible-producing industries, such as Arts, Entertainment, & Recreation, Educational & Health Services (excluding tangible services), Professional & Business Services (excluding tangible services), and Government (excluding Postal Service). Revisions to tangible-producing industries was mostly limited to Accommodation & Food Service, with some upward revisions to other tangible-producing industries.

Analysts were split as to what this means for the future of the economy. AP’s reporting on the revisions noted that the February and March growth was “still at a level considered vigorous by historical standards.” The Washington Post said that the revised data is “yet another sign that the labor market is cooling from its peak.”

One wonders what the Federal Reserve’s actions might have been if they had had this information.

And, as I noted last month, the chart below shows there is an interesting question as to what happened in the Great Recession. More later on the long-term shift.

Industrial Policy for the Working Class

The Center for American Progress (CAP) has a new report out looking at the economic situation of what it defines as the working class (updating an earlier report from 2017). For this analysis, both reports define “working class” as those in the labor force with less that a college degree. By this definition, the working class makes up 62% of the labor force in 2021. The college educated makes up the remaining 38%. According to the report, this two-third of the labor force defined as the working class is highly diversified. Black, Hispanic, and other workers of color make up 45% of the working class compared to only 32% of the college educated. Women comprise 44% of the working class.

What I found more interesting is the industry and occupational breakdown. As the report states, “Working-class Americans primarily work in different occupations and industries than workers with college degrees.” Manufacturing and construction sectors provide many working class jobs—construction with 12% of working class employment and manufacturing with 10%. But, as both reports point out, most working class jobs are found in the various services industries. And, as the latest report states, “members of the working class are far more likely to be employed in retail, accommodation and food service, material moving and truck driving, and building cleaning or other service roles; even in construction, they largely work as laborers. Additionally, home health aides and personal care aides together constitute one of the largest working-class labor forces in the country—more than 1.6 million workers.”

Those of you who read my occasional posting on the employment number will quickly spot a key commonality among these industries. They are tangible-producing industries. A quick look at the breakdown of industry segments employing the working class (from the 2017 report) shows tangible-producing industries employing roughly 44% of working class workers and intangible-producing services employing roughly 31%.

Why is this important? It reinforces but refines the point CAP makes concerning economic/industrial policy. The Biden Administration’s industrial policy related legislation (the Inflation Reduction Act, the Infrastructure Investment and Jobs Act (IIJA), and the CHIPS and Science Act) were important steps forward. But they are targeted at advanced manufacturing and knowledge industries. More needs to be done to improve the economic wellbeing of the working class. The next wave of industrial policy should include ways to improve working conditions in the service sector. Some of those policies will cut across industries, such as strengthening the right to organize. Others should be more targeted.

The trick will be to craft policies relevant to the specific industry with special attention should to the tangible-producing services. After all, the working conditions and economic challenges facing janitors and retail salespersons differ from those facing software developers and accountants. Even within the tangible-producing services, there may be different policy needs. Raising the minimum wage might help both home health care aids and fast-food workers. But home health care aids face a very different regulatory environment, requiring a more refined policy response.

Such a tailored set of policies is likely to come in the form of small changes to regulations and programs rather than big legislative packages. Something to watch for as the policy process continues to unfold.