Insights and Resources

The Roaring 20s, for a new century

How changing economy will affect companies as the pandemic subsides

INSIGHT ARTICLE  | 

Authored by RSM US LLP


The American economy is poised for robust growth as it climbs out of a deep recession, and middle market companies stand to benefit, said Jerry Nickelsburg, director of UCLA Anderson Forecast, and Joe Brusuelas, chief economist for RSM, at a joint conference on April 14.

In a lively hour-long virtual session to discuss economic conditions in the middle market, Nickelsburg and Brusuelas highlighted several important trends at work in today’s economy:

  • Inflation will remain in check, despite an expected temporary increase because of technical factors.
  • Wages will also remain muted, particularly for lower-skilled workers who face competition from a global workforce, and, increasingly, from robots.
  • Productivity will leap ahead, thanks to digital investments that accelerated during the pandemic.
  • Supply chains will be repaired, though political pressures and lingering trade tensions could pose risks.
  • The economic gains will not be equally shared, with higher-income workers disproportionately benefiting, and tech-savvy regions of the country attracting new business and investment.

Inflation and wages

Both agreed that recent concerns around inflation have been overstated. Whatever price increases take place in the short term are likely to be temporary, they said, as comparisons to the steep declines of a year ago cycle through. At the same time, long-term downward pressure on prices will keep fears of 1970s-style inflation in check. Much has changed, they said, between the economy of the 1970s and today.

“In the 20th century, tight labor markets led to higher wages and higher prices,” Nickelsburg said. “That is not happening in the 21st century.” Nickelsburg pointed to global pressures on wages, slack in the economy as many workers remain on the sidelines and the rise of robotics to perform low-skill jobs.

“Workers are increasingly competing with capital,” Nickelsburg said. Employers today have the option of deploying robots to replace workers, all of which dampens wages. And without wage inflation, the chances of a broad-based increase in prices are greatly diminished.

Nickelsburg noted that there will be isolated areas of inflation, whether it’s in housing or in raw materials and other input prices, but that’s not the same broad-based upward pressure on prices like that of the 1970s.

Productivity

Even as the pandemic inflicted significant pain on workers and businesses, it also forced businesses to rethink how they managed their operations. The result was a significant investment in digital technologies, not only to better serve customers who were stuck at home, but also to maintain a remote workforce.

A clear example is the rise of video conferencing—which is how Nickelsburg and Brusuelas conducted their session. Two years ago, the conference would not have taken place, but the pandemic forced businesses to adapt. And in many cases, it’s a better use of time and resources, Brusuelas said. “We learned, and we’re not going back,” he said.

Brusuelas added that RSM research had found that in the years before the pandemic, many middle market businesses had been reluctant, for whatever reason, to invest in productivity-enhancing technologies. But that all changed in the past year, and many businesses have taken advantage of a rare period of negative real interest rates to make investments that will pay off in greater productivity in the long term.

In the most recent survey of middle market executives in the RSM US Middle Market Business Index, 55% said they planned to pick up the pace of investment, Brusuelas said.

Nickelsburg painted an optimistic picture of productivity in the economy, which before the pandemic had lagged the gains of other eras.

“We could see a real jump in productivity gains,” he said. “There are some bright things on the horizon.”

Supply chains

One factor that could pose a risk to the recovery, they said, was the effect of political instability and trade tensions on supply chains that middle market businesses depend on.

Nickelsburg pointed to the political climate in Mexico, where a humanitarian crisis at the border with the United States and a populist president could pose a risk to the stability of supply chains in North America, particularly in the all-important auto industry.

In China, lingering trade tensions pose a challenge for businesses that rely on that country’s vast network of manufacturers. And some of these are in industries that have proven to be critical to American national security. Pharmaceutical companies, for example, rely on Chinese manufacturers for important ingredients in their medicines—which became apparent early in the pandemic—and health care providers also faced a shortage of Chinese-made face masks.

Still, the pandemic did show just how hard it is for American manufacturers to replicate supply chains in the short term, Nickelsburg said, which only reinforces the mutual dependence of the two economies.

Uneven recovery

But even as Nickelsburg and Brusuelas both predicted a strong recovery—perhaps the fastest expansion since World War II—they struck a cautionary note that the gains won’t necessarily be equally shared among workers, and among geographic regions of the United States.

That’s because those workers who have weathered the recession the best—those in the knowledge and information sectors—stand to gain the most as the economy recovers. Low-wage workers, by contrast, will have a harder time recouping their lost ground.

It’s known as the K-shaped recovery, Brusuelas said, with higher-income workers gaining and lower-income workers struggling. And this poses a challenge for workers and policymakers.

“The bartender is going to have to learn to code,” Brusuelas said.

The dichotomy is not just with people, but with regions as well. Capital continues to flow to industries and regions that have adapted best to the information economy, especially in the South and Southwest, Brusuelas said. Cities like Seattle and Austin are benefiting, and attracting high-skilled workers. Areas reliant on heavy industry, by contrast, continue to see slower growth, or even outflows of people and capital.

Nickelsburg likened the dynamic of the Austins of today to the California of the 1970s, which grew rapidly as workers moved to the state, attracted by its booming economy and lifestyle.

But that has changed. Many areas in California, for example, are being forced to rezone to embrace higher-density housing and accommodate additional units in residential areas—think of “granny garages.”

“It’s evolutionary, not revolutionary,” Nickelsburg said.

Still, there’s no mistaking where the capital and the people are flowing. Now, it’s Austin’s turn as it benefits from its proximity to the University of Texas and the state capitol, a business-friendly tax structure and a booming digital economy.

Let's Talk!

Call us at +1 213.873.1700, email us at solutions@vasquezcpa.com or fill out the form below and we'll contact you to discuss your specific situation.

  • Topic Name:
  • Should be Empty:

This article was written by Joe Brusuelas and originally appeared on 2021-04-27.
2020 RSM US LLP. All rights reserved.
https://rsmus.com/economics/economic-insights/the-roaring-20s-for-a-new-century.html

RSM US Alliance provides its members with access to resources of RSM US LLP. RSM US Alliance member firms are separate and independent businesses and legal entities that are responsible for their own acts and omissions, and each is separate and independent from RSM US LLP. RSM US LLP is the U.S. member firm of RSM International, a global network of independent audit, tax, and consulting firms. Members of RSM US Alliance have access to RSM International resources through RSM US LLP but are not member firms of RSM International. Visit rsmus.com/about us for more information regarding RSM US LLP and RSM International. The RSM logo is used under license by RSM US LLP. RSM US Alliance products and services are proprietary to RSM US LLP.

​Vasquez & Company LLP is a proud member of the RSM US Alliance, a premier affiliation of independent accounting and consulting firms in the United States. RSM US Alliance provides our firm with access to resources of RSM US LLP, the leading provider of audit, tax and consulting services focused on the middle market. RSM US LLP is a licensed CPA firm and the U.S. member of RSM International, a global network of independent audit, tax and consulting firms with more than 43,000 people in over 120 countries.

Our membership in RSM US Alliance has elevated our capabilities in the marketplace, helping to differentiate our firm from the competition while allowing us to maintain our independence and entrepreneurial culture. We have access to a valuable peer network of like-sized firms as well as a broad range of tools, expertise and technical resources.

For more information on how ​Vasquez & Company LLP can assist you, please call +1 213.873.1700.

Subscribe to receive important updates from our Insights and Resources.

  • Should be Empty: