Gary Shilling's Guide to the Post-Pandemic Economy, Part 2
(Bloomberg Opinion) -- I explored the first four of 12 lasting effects of the Covid-19 pandemic on the economy and financial markets in my previous column. Here are four more: greater use of telecommunications, a shift in preferred residences, more employee independence and an increased emphasis on online shopping.
Greater use of extant telecommunications has been forced by the pandemic, which has also encouraged the development of new technology. Zoom calls have replaced many in-person, face-to-face meetings and taught us that personal encounters aren’t always needed in business and personal relationships. Zoom Video Communications Inc.’s stock is well down from its highs a year ago, but is still three-and-a-half times where it was in January 2020, just before the virus closed the economy.
Previously, I visited many clients, even if it was just to show that I cared about them and appreciated their business. After a year-and-a-half or more absence from offices, many clients don’t see that necessity of in-person meetings. Remote meetings tend to be shorter and more efficient than physical encounters, even without considering the travel time saved. These changes will persist long after Covid-19 and its derivatives are conquered. This is good news for telecommunications equipment and services providers. And it will probably be a negative for airlines, hotels and others servicing business travelers.
Many people abandoned expensive city living for spacious single-family homes in the suburbs and smaller cities to escape the virus, and to spend more time with families and less time commuting. According to the Census Bureau, average commuting time rose 10.4% from 25 minutes in 2006 to 27.6 minutes in 2019. The further away from major cities, the greater the rise in home values over the last two years.
Employers are allowing many employees to work remotely. Amazon.com Inc. moved from asking employees to be in their offices three days a week to letting some work remotely full-time. PricewaterhouseCoopers LLP allows employees to live anywhere, but their pay will be determined by geographic location and their local cost of living. Meta Platforms Inc. (formerly Facebook) is expanding remote-work eligibility to all levels of the company, including early-career employees and entry-level engineers.
Manhattan employers projected that 62% of workers would be back in their offices by September, but in early October, only 30% were back. Overall, the Manhattan office vacancy rate is 16.8%, the highest since post-financial crisis 2010, according to the regional real estate firm CBRE Group. With empty office buildings nearby, retail vacancies have doubled to 30% in key Manhattan areas. The Wall Street Journal/Realtor.com housing index ranks cities by house price appreciation and lifestyle amenities. In the third quarter, small U.S. cities dominated the list, with Elkhart, Indiana, topping the list followed by Rapid City, North Dakota, Topeka, Kansas, Raleigh, North Carolina and Jefferson City, Missouri.
To counter this trend, businesses in big cities are trying to lure employees back with amenity-laden office spaces. These include custom-built lounges, game rooms and outdoor dining spaces with fire pits. This is expensive. According to data from VTS, the difference between rents in trophy buildings and the rest is a record 43%. Investors need to consider this lasting effect of on real estate.
After being at home with the pandemic, many Americans have rethought their commitment to work. Labor participation rates for men and even more so for women have decreased, and three million people have taken early retirement, according to the Federal Reserve Bank of St. Louis. With job openings vastly exceeding the unemployed, the quit rate has leaped and labor unions are aggressive, as shown by the ongoing strike at Deere & Co. and walkouts at Volvo Car AB and breakfast cereal maker Kellogg Co.
Real wages normally rise after major pandemics that kill labor but not capital equipment, unlike wars that destroy both. Thanks to health measures, including vaccines, Covid-19 killed just 0.06% of the world population. In contrast, the Black Plague in the 14th century killed an estimated 30% to 60% of Europe’s population and slashed world population from 475 million to somewhere between 350 million and 375 million. It took 200 years for global population to recover. Today, however, it isn’t Covid-19 related deaths but the change in attitude toward work that have shrunk the labor supply, even after all the extra unemployment benefits expired. The obvious winners are labor-saving equipment and services.
The shares of national income paid in labor compensation and corporate profits are mirror images, and oscillate with neither side gaining the upper hand for too long, as you’d expect in a democracy. Since the 2008 financial crisis, profits’ share has fallen from a peak and labor’s has risen, and these trends will probably persist. In addition to these basic economic forces, President Joe Biden and his fellow Democrats are determined to redistribute income with higher taxes on corporate profits, wealthy individuals and capital gains while providing more help to lower-income households.
The pandemic accelerated the ongoing shift from consumer buying in brick-and-mortar stores to online shopping. In 2000, online shopping accounted for 5.2% of retail sales and department stores, 7.2%. In January 2020, right before the pandemic, those numbers were 12.4% for online and 2.1% in stores. Then non-store sales jumped to 14.3% of the total in September while department stores dropped to 2.0%. These trends will probably persist since consumers have tasted the convenience of ordering online for next-day delivery of everything from precooked meals to computers. These trends continue to favor Amazon and similar services at the expense of department stores.
Now, even cars can be sold online. Ford Motor Co. introduced a program to facilitate online purchases of new cars with customized options that are then picked up at dealer locations. This will allow Ford to operate with a 50-to-60-day supply of vehicles on dealers’ lots compared with 75 days historically.
My next column will discuss the four remaining lasting effects of the pandemic: more consumer caution and higher saving rates, slower global economic growth with low inflation and interest rates, commodity prices weakness and subdued equity prices.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Gary Shilling is president of A. Gary Shilling & Co., a New Jersey consultancy, a Registered Investment Advisor and author of “The Age of Deleveraging: Investment Strategies for a Decade of Slow Growth and Deflation.” Some portfolios he manages invest in currencies and commodities.
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