Automatic Job Storm Coming
John Mauldin
Almost every weekday, some arm of the US government issues some
sort of economic statistic. News media and financial analysts review and report
it. Then 99.9% of the adult population, and probably 90% of the financial
industry, forget all about it. And they’re probably right to do so.
The monthly jobs report isn’t like that. Yes, any single month
doesn’t tell us much. Yes, the Labor Department’s methodology has some flaws,
both major and minor. But imperfect as it is, the jobs report is our best look
at the economy’s pulse. Jobs matter in a visceral way to almost all of us, as
you know well if you’ve ever lost one. Almost any survey that asked questions
around employment would reveal the angst that many Americans feel about the
possibility of losing their jobs.
Image: Cristian Eslava
Right now, automation tops the list of things that might threaten
our jobs. Artificial intelligence and robotics technology are rapidly learning
to do what human workers do, but better, faster, and cheaper.
I’ve use the following chart before, but it’s a compelling
illustration of how technology is reducing employment. It shows the rising rig
count in the oil patch since mid-2016 – and yet the number of workers on those
rigs is actually still falling. This is the impact of a new robot called an
iron roughneck: Tasks that used to require 20 people now need only five. And
the iron roughneck is not even that widely deployed in the oil and gas industry
– the trend will hit hard in the coming decade. Roughneck jobs are relatively
high-paying; it takes a great deal of training and skill to be able to do them.
Today I’ll give you some quick thoughts on the just-issued
November jobs report, then take a deeper look at the automation
problem/opportunity. I use both words because automation truly can be either.
And then we look at the failure of the Federal Open Market Committee (FOMC) to
take into account the major technological changes that are going to come our
way over the next 10 to 12 years (if a host of studies are correct). I think that
failure is likely to lead the FOMC to make the mother of all policy errors. And
right now, a major monetary policy error is the most dangerous weapon of mass
wealth destruction facing the US and the world.
Before we go on, let me briefly remind you that our Mauldin
Economics VIP Program is open until December 13. VIP is our “all you can eat”
package. For one low price, you get all our premium investment services and a
few extra benefits as well. I believe our information will be invaluable as we
move into a highly uncertain 2018. You can learn more about the VIP program
here.
The jobs report for November was solid, with job growth above the
recent average.
But earnings were a disappointment, as we will see. Philippa
Dunne’s summed up the report in a recent commentary:
Employers added 228,000 jobs in November, 221,000 of them in the
private sector. Both are nicely above their averages over the last six months,
164,000 headline and 162,000 private. Almost all the major sectors and
subsectors were positive. Mining and logging was up 7,000 (slightly above the
average for the last year); construction, 24,000 (well above average, with
specialty trades strong and civil/heavy down); manufacturing 31,000 (well above
average, with almost all of it from durables); wholesale trade, 3,000 (slightly
below average); retail, 19,000 (vs. an average loss of 2,000); transportation
and warehousing, 11,000 (well above average); finance, 8,000 (weaker than
average); professional and business services, 46,000 (right on its average,
with temp firms particularly strong); education and health, 54,000 (well above
average, with education, health care, and social assistance all participating);
and leisure and hospitality, 14,000 (well below average). The only major down
sector was information, off 4,000, slightly less negative than average.
Government added 7,000, well above average, with local leading the way.
What’s not to like about this? The answer is that we really need
to review the report in terms of the trend. And the trend in employment is
deceleration. As Peter Boockvar explains,
Also, we must smooth out all the post storm disruptions. This give
us a 3-month average monthly job gain of 170k, a 6-month average of 178k, and a
year-to-date average of 174k. These numbers compare with average job growth of
187k in 2016, 226k in 2015, and 250k in 2014. Again, the slowdown in job
creation is a natural outgrowth of the stage of the economic cycle we are in
where it gets more and more difficult finding the right supply of labor.
The growth in wages is also decelerating. I was talking with Lacy
Hunt this morning about the jobs report. He noted that real wage growth for the
year ending November 2015 was 2.8%, while for the year ending November 2016 it
was just 1%. The savings rate is now the lowest in 10 years. The velocity of
money is still slowing, which means that businesses have to do everything they
can to hold down costs, and one of those things is to rein in wages.
And yet the Federal Reserve has a fetish for this thing called the
Phillips curve, a theory that was thoroughly debunked by Milton Friedman early
on and later by numerous other economists as having no empirical link to
reality. But since the Fed has no other model, they cling desperately to it,
like a drowning man to a bit of driftwood. Basically, the theory says that when
employment is close to being as full, as it is right now, wage inflation is
right around the corner. According to the Phillips curve, then, the FOMC needs
to be tightening monetary policy. Later we’ll see how the FOMC’s faulty
tool is likely to lead to a major monetary policy error.
Basically, the Federal Reserve looks at history and tries to
conjure models of future economic performance based on it – even as everyone in
the financial industry goes on intoning that past performance is not indicative
of future results. But all the Fed has is history, and they cling to it. My
contention is that the near future is not going to look like the near or the
distant past, and so we had better throw out our historical analogies and start
thinking outside the box. Now let’s look at some real problems that will impact
the future of employment.
Last month I shared in Outside
the Box a new McKinsey report on job automation. Actually, I
shared an Axios article summarizing that report, which is 160 pages long. You
can read
it here if you have time. McKinsey does a good job pulling together data
and forecasting its consequences.
Every year, reports like this reflect a process that’s occurred
many times in human history. People discover or invent something useful: fire,
the wheel, iron, gunpowder, coal, oil, the steam engine, electricity, the
automobile, the airplane, the computer, etc. Life changes as the new knowledge
spreads. People either adapt or they don’t. Those who don’t adapt fade into the
background. In the last few decades of their working lives, they end up taking
the very lowliest of jobs in order to get some food, clothing, and shelter; but
it’s not a comfortable life. There was no government safety net for most of our
history. But most people tried hard to adapt their skills to the new changes.
And as we adapted to radically disruptive inventions like the steam engine,
automobile, and computer, hardly anyone had the necessary skills, and so
everyone had to learn.
Today, things are different. Fifteen percent of men between the
ages of 25 and 54 – who should be in their most productive years of
contributing to their families and society – don’t even want a job. That’s up from
5% in the mid-’60s, and the number has been steadily rising. Fifty-six percent
of these people receive federal disability payments, averaging about $13,000,
which is roughly equivalent to the pay for a minimum-wage job, after taxes – except
that disability comes with free Medicare. Unless these people find ways to
develop needed skills, there is not much financial incentive for them to look
for jobs.
The rest of the people who don’t want jobs are mostly early
retirees, homemakers, caregivers, or students. And roughly 1/3 of the 10
million+ men who have dropped out of the workforce have criminal records, which
is often a barrier to work. Only about 3–4% are actually discouraged workers
who might take a job if a job is available. That picture should be worrying. It
is one reason why GDP has not increased all that much. Remember that GDP is
proportional to the number of workers available times their productivity.
Taking 10 million workers out of the workforce reduces GDP.
The problem for most of us now is that we don’t want to simply
fade into the background like so many people have done with each major shift in
technology; yet new knowledge spreads around the globe now in seconds instead
of centuries. It’s easy to feel that the walls are closing in, because for many
of us they are. The McKinsey report makes that crystal clear. They project that
technology will replace as many as 800 million workers worldwide by 2030.
Displacement is not just a US or developed-world phenomenon; it will show up in
the emerging and developing markets as well.
McKinsey draws a distinction that we should all remember. The
problem is less about jobs
disappearing than about the automation of particular tasks that are part of our
jobs. In most cases, employers can’t simply fire a human, plug in a robot, and
accomplish all the same things at the same or better performance level but
lower cost. You have to zoom in closer and look at the tasks that each job
entails, and ask which of them can be automated. The roughneck jobs in the
oilfield are a good example: The Iron Roughneck doesn’t replace all workers on
the rig, just some of them.
So when McKinsey says that 23% of US “current work activity hours”
will be automated by 2030, that’s not the same as saying 23% of jobs. The shift
will affect almost all jobs to some degree. That 23% figure is their “midpoint”
scenario, too. In the “rapid” scenario it’s 44% of US current work activity
hours that will be handed over to machines.
In other words, whatever your job is, some part of it will likely
get automated in the next decade or so. That might be good news if the machines
can take on the repetitive drudgery that you don’t enjoy. Automation could free
you to do things that are more interesting to you and more valuable to your employer.
But outcomes are going to vary widely. Here’s a chart on sector and occupation
employment shifts from McKinsey. (This one is for the US; their report has
sections for other countries as well.)
The circles on the right are the translation of those task-hours
into numbers of workers. As you can see, in their rapid automation scenario, by
2030 – just 12 years from now – 73 million people out of a workforce of 166
million will have been displaced, with 48–54 million of them needing to change
occupations completely.
In other words, a full third of the workforce may have to change
career fields. That’s going to be a problem. Yes, Americans change jobs more
frequently now than they used to, but the changes tend to be evolutionary: We
gain new skills, find a better place to apply them, acquire new contacts, seek
out new opportunities, and so on. The personal transformation happens slowly
enough to be manageable. That’s going to change.
My friend Danielle DiMartino highlights another of the amazing
charts in the McKinsey study, one that analyzes US job-market susceptibility to
automation scale:
This chart demonstrates that it’s not just the low-skilled workers
who are at risk. It’s also mid-level and even some high-level people. There is
more job risk than many of us imagine. That is why I break the world up into
the Unprotected, the Protected, and the Vulnerable Protected classes. The
latter group doesn’t even realize their vulnerability.
Worse, I think the shift to automation may come even faster than
McKinsey’s rapid scenario suggests. Recently I ran across an artificial intelligence
story that’s almost terrifying. You might have heard about AlphaGo, the AI
system created by Google subsidiary DeepMind. It plays the very complex board
game called Go.
In 2015, DeepMind became the first computer to beat a human
professional Go player. It learned how to do this by analyzing many thousands
of games played by humans. Impressive, but only the beginning.
This year, DeepMind introduced AlphaGo Zero, a new system that
quickly acquired the same skills with no human help at all. The programmers
simply gave it a blank board and the rules of the game. It then played millions
of games against itself.
Here’s the chilling quote from DeepMind CEO Demis Hassabis:
The most striking thing is that we don’t need any human data
anymore.
It gets more unnerving. On December 5 (yes, last week), DeepMind
published a scientific
paper that sounds straight out of science fiction.
The AlphaGo Zero program recently achieved superhuman performance
in the game of Go, by tabula rasa reinforcement learning from games of
self-play. In this paper, we generalise this approach into a single AlphaZero algorithm that can
achieve, tabula rasa, superhuman performance in many challenging domains.
Starting from random play, and given no domain
knowledge except the game rules, AlphaZero achieved within 24 hours a
superhuman level of play in the games of chess and shogi (Japanese chess) as
well as Go, and convincingly defeated a world-champion program in each case.
That’s startling, so let me repeat it slowly. In one day, starting
from nothing at all (“tabula rasa”), AlphaGo Zero learned to play chess, shogi,
and Go at a superhuman level, beating the same systems that had beaten the best
humans in the world.
That’s how fast the technology is evolving. I suspect some of the
rapid acceleration came from faster processor chips – Moore’s law says they
should double in power every two years. But this was far more than a doubling;
this was exponential.
Systems like that are coming for your job. So if you think you’re
safe because you aren’t an assembly-line worker or a retail cashier and don’t
work at the level of rote repetition, you could be wrong. These systems will
only get better and take on ever more complex jobs.
Could DeepMind build a system that reads my archives, monitors my
email, and then writes Thoughts
from the Frontline at a level where you couldn’t tell the
difference between it and me?
How do you know it hasn’t?
Those who control the tech are intent on bringing the era of
superautomation forward as fast as possible. I talk a lot about incentives and
the way people and businesses respond to them. Identifying incentives is a key
tool in analyzing trends and forecasting what different players will do next.
Well, between dicey Federal Reserve policies and possible tax reforms,
businesses are getting new incentives to automate sooner rather than later.
First, the Fed. I’ve made the case before that I think they
waited too long to end quantitative easing and begin normalizing interest
rates. Their delay created our present weird situation where we have little or
no inflation according to the indexes, but the cost of living for people at the
median income level and below is outpacing wage growth and leaving the average
household struggling to stay even.
Real wages, that is wages after CPI growth, have advanced only
0.2% a year since 1973. And as I noted above, real wage growth is now
decelerating.
Diminished earning power has, in turn, robbed businesses of
pricing power and forced them to cut costs ruthlessly. One way you slash costs
is by automating. In this week’s Outside
the Box I shared a story about how Amazon is now hiring robots
faster than it is human employees. Amazon is in the lead, but other companies
aren’t far behind. This trend limits wage gains even more, and the situation is
getting worse as the technology gets better and cheaper. (The fact that San
Francisco has limited the number of robots per company and limited the speed of
robotic delivery simply ensures that San Francisco will be behind the rest of
the country in terms of growth and productivity within a few years.)
Of course, there’s absolutely nothing wrong with making your
business more efficient. You have to survive against the competition. But in
this case the competition is not happening naturally or according to market
forces. The Fed has kept
market forces from working and has created an environment that would never have
occurred otherwise. You can argue whether a laissez faire market would have
worked better or worse, but it’s pretty clear we haven’t had one.
Now add in tax policy. I explained early this year in my open
letters to the new US president that we would all be better off with a consumption
tax like a VAT rather than we are currently with the income tax. Alas, I did
not get my wish. Congress is right now “improving” the tax code in ways that
may actually accelerate the automation trend.
(Incidentally, I’m getting many emails with questions about the
new Republican tax plan. I’ll have more detailed thoughts after we see what, if
anything, gets through the conference committee and becomes law. At this point
it’s still a guessing game, and I would rather comment on what is actually extruded
from the sausage grinder. Let me just say that there’s something in the bill
for everybody to hate.)
For instance, one proposal is to allow equipment purchases to be
expensed immediately instead of amortized over time. That’s not a bad idea on
its own. However, it effectively subsidizes companies to upgrade their
equipment and technology to the latest state of the art. And, as we saw above,
the state of the art is automated devices that need little human help.
The accelerated shift to automation may help explain a Business
Roundtable survey that showed some odd results. As reported by the Wall
Street Journal last week, CEOs say their plans for capital
investment have risen to the highest level since the second quarter of 2011.
That’s good news: Businesses see growth opportunities and want to add
production capacity to meet them. But the same survey shows CEO hiring
expectations going in the opposite
direction. Hiring is not plummeting by any means, and many do plan to increase
hiring over the next six months; but the majority say they will keep their
headcount where it is or lower it. General Electric will cut 12,000 jobs from
its power business, roughly 18% of that division’s total employment, in order
to cut costs and reduce overcapacity.
How do we explain a situation in which capital spending rises but
employment stay the same or falls? Automation is one answer. It lets you
increase capacity without increasing headcount and expenses – you may even
reduce them.
Not coincidentally, the new tax bill may remove the Obamacare
individual mandate, but the employer mandate is staying in place – and
healthcare costs are still rising. That too incentivizes businesses to use
machines instead of people wherever possible.
So where do all these factors leave human workers? The McKinsey
forecasts fall more or less at the midpoint of those in other reports I am
reading. We’re facing a perfect storm: Technological, monetary, and political
entities are joining forces to stir up a maelstrom of change that is going to
bombard all of us. I’m not an exception, and neither are you.
We can’t control these giant forces, but we can control our
responses. Whatever your job is now, you need to think about how vulnerable it
may be and what else you might do. If you need to acquire new skills, start
doing it now. If you have young adult or teen children, help them with their
education and career choices. That art history degree may not be much in demand
in 2030. Or even in 2020.
Looking ahead brings us full circle, right back to considering the
potential for a major monetary policy error. We may, in fact, see a little wage
inflation in the near future, and I think that would be a good thing,
considering how little there has been for years; but right now the Personal
Consumption Expenditures Index (PCE) is hovering around annual growth of 1.5%,
still well below the Fed’s target of 2%. What would be the danger of letting it
rise to 2.5%? Seriously.
This FOMC gives every indication that they are not only going to
continue to raise rates but are also going to reduce the Fed’s balance sheet by
some $450 billion next year. The Fed thinks QE helped to bring about the rising
asset prices (stocks, bonds, and housing – assets of all types). Yet somehow
they believe that quantitative tightening (QT) won’t have any effect on the
markets. Of course, there is no empirical evidence for that conclusion, unless
you want to count the taper tantrum that was unleashed when interest rate
increases and quantitative tightening were first mentioned.
The Fed, with their slavish fetish for the Phillips Curve, see
wage inflation just around the corner, and they want to head it off at the
pass. But if they are as data-dependent as they say they are, they should look
at their data and see that there is no wage inflation. There is a reason why
there isn’t: The vast bulk of workers do not have pricing power. The labor
market has changed dramatically in the last 20 years, and every study I have
read as I have researched the future of work suggests that employment is going
to change even more drastically in the next 20 years.
If we have 20 million workers who presumably want to have jobs but
suddenly find themselves without job opportunities because of automation and
other forces, that is not an environment in which we are going to see wage
inflation. That is a situation in which workers will take whatever wages they
can get. Think Greece.
Monetary growth is decelerating, too. The velocity of money
continues to fall. Total consumer debt as a percentage of disposable income is
the highest it has ever been – over 26%. The savings rate has fallen to a
10-year low. Consumers are stretched, and there is just not the buying power –
no matter how low interest rates are – to create the inflation that the Fed is
so afraid of.
I could go on and on about the fragility of this economy, even
though on the surface it seems to be the strongest it has been since the Great
Recession. Looking ahead, 2018 should be another year for growth. So I look
around and ask, what could endanger that? I think the biggest risk is a central
bank policy error.
We are going into unknown territory. Beyond this point, there be
dragons.
I should add that I am generally optimistic about 2018. My
forecast issues this year will probably be more optimistic than they have been
for a long time. Not necessarily in terms of stock market prices, but regarding
the economy in general. I actually have this hope – which I recognize is not a
strategy – that the Federal Reserve will back off sooner rather than later and
we can avoid a downturn in the economy for another few years. I think nothing
could make me happier than if we actually established the record for the
longest recovery.
Home for Christmas, then
Hong Kong
Other than a brief trip here and there – and who knows what will
slip into the schedule – I will be home for most of December. Shane and I will
be in Hong Kong for the Bank of America Merrill Lynch conference in the first
week in January January. That trip will be made even more fun because Lacy Hunt
and his wife JK will be there with us. We are going to take an extra day or two
and be tourists. I’ve been to Hong Kong many times but have never really gotten
out of the business district. The last time I was there Peter church house and
his son Tama took us to lunch and then on a sailing expedition through the
harbor of Hong Kong. He even let Shane and me take turns at the wheel, so we
could pretend to be sailors. We have a picture to prove it!
One thing I will be doing in Hong Kong is getting some new dress
shirts. My workouts the past year or so have focused a lot more on my shoulders
and shrugs, and I have actually added a full inch to my neck size. I have
literally only one shirt that I can (barely) button to be able to wear a tie
with. I have been waiting for the Hong Kong trip, because you can get a custom
shirt made in just a few days, remarkably cheaply. I’m not sure that will mean
I’ll be wearing more ties, but at least I’ll be able to do so comfortably when
the need arises.
It has been a busy last few months. I am launching new businesses,
and of course that takes time. But amazing new opportunities have presented
themselves, and I’m in the process of establishing new relationships that will
significantly improve my ability to serve the investment advisor community, not
just here but all around the world. We are also working on some exciting new
newsletters built around the resources and networks that I have compiled over
the years. There is a wealth of information out there that we can bring to you
that will significantly improve your ability not just to access and manage your
investments but to get in control of your life. Putting all these new business
relationships in place takes a team, especially management, which is not my
forte. Identifying the people that can take these visions of the future and
turn them into realities has been a challenge, but now all the pieces are in
place and the engine is revving up.
I look forward to being able to serve you in the New Year in
brand-new ways. And as a personal request, I would like to hear your ideas on
what I should be writing about in my weekly letters. I really do value your
feedback and ideas.
And with that, I will hit the send button. You have a great week!
Your hoping the Fed will not be as aggressive as they suggest
analyst,
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