More thoughts on the future economy

A few weeks ago I wrote these notes anticipating that the grand rewiring of the economy post-COVID would mean that we were in for an extended recession. Notwithstanding the fact that states are rushing to reopen and some performative confidence by patrons as bars do so, I continue to see a lot of evidence of the changes bubbling under.

Changing consumer purchasing behavior

I see this drastically in my own habits – I’m buying eggs by the dozens but I haven’t filled my gas tank in weeks. If there’s more than a 50% shot I won’t find an item on my next trip out to the supermarket – calculator batteries, spelt flour—I don’t think a second before ordering it online. While a lot of this is situational due to the lockdown, I’m finding new ways to do things that are likely to grow into lasting habits. 

This NY Times article illustrates how this is changing things on a grander level:

• Online consumer spending +20% year over year with in-store sales falling by the same percentage. And Target and Walmart are gaining ground on Amazon, speaking both to the ever-more-existential need for these retailers to meaningfully transition their models, and to the broadening of the retail customer base to purchasers who are not digital-first.
• People are making different choices – they’re buying proportionally more things to be used in the home. Home electronics are up; video games are up; athleisure is up. Business clothes are down.

My guess is that the money not spent with restaurants, Starbucks and American Airlines is going into home improvement as we improve our nests, and that as these nests become more comforting an ever greater proportion of spending is made at the home and invested back into the home.

The office environment

The way we use the workplace is going to change. The move to open plan workplaces has already put strain on individual work: at my last two employers, the accounting staff would self-isolate with noise cancelling headphones because the open benches were simply too distracting. 

The cost/benefit of keeping these workers in the office is passing a tipping point. COVID may or may not be covered by workers comp, but employers are worried about increased liability of the workplace. The logistics of managing this liability in order to reopen—some of which were discussed in a recent Axios conversation—include elevators with buttons that you cannot touch, Wellness Counselors that will monitor you for signs of illness, and new furniture and barriers in the office. All of these will be red flags that the office is not an entirely safe place to be, and this creates more costs to being in the office. 

On the other hand, the spread of remote technologies such as Slack, Zoom, and zero trust networking—and the experience employees are building in their use—is reducing the cost of remote work, as recently discussed in a piece in The Information. 

One can easily project that many fewer workers will be required to come into the office, and its primary purpose will become intense collaboration sessions. Each individual worker will require more space, but the population of the office will decrease. It is too soon to see where this will equilibrate—not every employer is willing to take as big a leap as Twitter—but it does not feel like it bodes well for the long value of corporate real estate and, as the NY Times has pointed out, the health of the ecosystem of businesses that serve workers during their day in the office.

Evolution of supply chains

COVID has also exposed that our supply chains are stretched too thin in many ways and creates a call for resilience and redundancy. There’s a continuing stockout of toilet paper and flour in my local supermarket, but there’s not really a shortage—it’s just stuck in the commercial distribution channel where I have a hard time getting at it. This supply channel stickiness in the case of potato farming is explained concisely by Ryan Cranney in a video for the Idaho Statesman.

It’s interesting to consider that in many ways we have made this problem worse, not better, through advanced management practices such as Just In Time manufacturing. In many cases redundancy and excess inventory have been labeled as waste; we’ve finely tuned supply chains to minimize the assets on the balance sheet. However, when a shock hits the level of resilience is low.

This theme plays out in variations throughout the economy. We have an inadequate supply of masks and health equipment being made in the US because we’ve outsourced them to Asia in the name of efficiency. We should also look a lot closer at the amount of cash that unicorn companies have on their balance sheets compared to their burn rates and expect this to be higher so the hard times can be managed with more grace.

How do we handle this? A few thoughts on where this might go:

• Investment in making our supply chains less specialized and more flexible. When we’ve solved the problem of true shortages, we should turn our attentions to more quickly moving the supply to where the demand is.
• A recalibration of what we mean by “waste” and inefficiency in manufacturing, in retail, and on balance sheets—building in more redundancy and slowing down a little bit.

My belief is that the shock to the system represented by COVID is going to give us the motivation, and time, to consider these strongly.