Amid the pandemic, one of the largest productivity booms ever

I recently read an account from a woman who lived in London during some of the darkest days of World War II. She was born and raised there and was in her mid-thirties when the war began. At first, the experience “felt far away…as if in another world.” It was as if she understood the experience conceptually but didn’t truly understand the impact or the tragedy because, at least to her, the war hadn’t yet impacted her day-to-day existence.

And then the German Blitz began in the latter part of 1940, and for this woman living in the East End, everything changed. Her daily routine of reading in the mornings on her patio while she ate poached eggs came to a halt. She could hear the planes approaching, feel the bombs being dropped, see the destruction left in the wake, and emotionally connect to the damage being wrought. Friends, neighbors, and family members were injured, lost, or killed, and she experienced, for the first time, those losses in living, and tragic, color.

Certainly, the events in London alone were horrific, let alone the tragedy of what was occurring across Europe. Yet what this woman struggled with most was the uncertainty of how long it would last.

She would stay up at night bracing for impact, take stock of the damage, and inevitably, look for signs of hope as the day progressed, convincing herself that “maybe last night wasn’t as bad as usual,” or “it didn’t sound like as much damage,” or “I heard the Germans were going to move on.” And then, again, the bombing would start the next night. And the next. And the next … for 57 straight nights.

She found the constant fluctuation of hope exhausting. The bombing would end, only to start again. Hope would grow, be destroyed, find its way back, and then, inevitably, be destroyed once more.

I was reminded of this story recently as I listened to commentary of the current COVID-19 pandemic. We seem to get our case growth curves under control, only to see another expansion. And while the reasons vary (over-confidence, new variants, misinformation, confusing policy changes, etc.), I often find there are more interesting perspectives inherent in the data itself than what we hear in the dominant narratives. As such, in this update we explore the data to provide some perspective.

Once that’s out of the way, we will turn to a more optimistic perspective: namely, one of the largest productivity booms in the history of humankind.

With that, let us begin.

COVID-19 status

While it pains me to have to speak of COVID at all, unfortunately, it is rearing its ugly and insidious head once again, and the increases in cases are now beginning to influence consumer behavior, which will, of course, impact the economy and markets if this continues.

As of August 23:

• There are now more than 212 million people worldwide who have had confirmed COVID-19 infections (nearly 3 percent of the world’s population).¹
• There are nearly 39 million Americans who have had confirmed COVID-19 infections (roughly 11.5 percent of the United States population).²
• There have been a bit more than 4.4 million deaths attributable directly to the COVID-19 virus, and more than 645,000 of those occurred in the United States.²

Those are staggering numbers. For context, there are roughly 4.4 million people in the great state of Oregon. The worldwide deaths (that, to be clear, are confirmed) are equivalent to losing every Oregonian over the course of a bit more than a year.

And yet, we have made tremendous strides. From a vaccination perspective, as of Aug. 23, more than 4.9 billion vaccination doses have been administered, with more than 1.2 billion administered in the last month alone.² The sheer magnitude of the logistics for that many vaccinations is remarkable and should be commended.

Yet, as we have discussed before, while markets acknowledge numbers at a point in time, they are more likely to adjust based on how those numbers change over time. This brings us to Chart 1.

As Chart 1 demonstrates, while we are not yet back to the peaks achieved in late of 2020 and early 2021, the daily number of cases is increasing quickly and approaching previous levels. We are now averaging nearly 150,000 cases daily in the United States; disheartening when compared with the average cases we had achieved in May and June (less than 10,000 per day).

The obvious extension to the case levels are the death levels as shown in Chart 2.

Toward the end of 2020 and the beginning of 2021, we frequently saw days with more than 3,000 deaths in the United States. We’re now seeing an average of roughly 700 deaths per day.

The astute observer may notice, however, that there is something different between those charts. Cases are back near previous levels, yet deaths, at least in the United States, are not. Why is that?

This brings us to Chart 3 and something we are watching closely.

Focus on the lower right section of Chart 3. Cases are growing, but deaths are not growing as rapidly—a strong argument for the potency of vaccinations. While we all know obtaining a vaccination doesn’t guarantee a person won’t get sick (we have seen many breakthrough cases), when that does occur, the likelihood of death seems to go down dramatically.

Regardless, as a pretend virologist by night, and a full-time investment professional by day, it is perhaps important to note that we are at a very important tipping point from a policy and economic perspective. As cases spike, policy makers across the country must decide what, if anything, to do about them, and those decisions (shut-downs, mandates, etc.) will have material impact on the economy, our jobs, and our lives.

We’ll continue to watch closely.

Productivity boom

For the second section, I would like to make a couple of very simple statements that, I believe, are perhaps surprising and not focused on enough.

Let us first establish a foundation.

There are only a couple of inputs we need to define.

First: jobs. Roughly speaking, there are two types of jobs: public and private. Public sector jobs are those that are, in some way, paid for by a government agency, and private sectors jobs are those that are, in some way, paid for by a company. Yes, there are lots of tiny details, but we can ignore those for now.

We went from about 130 million private sector jobs to 108 million private sector jobs during the worst of the COVID contraction. We also went from roughly 23 million public sector jobs to 21.5 million public sector jobs (the public sector is obviously less susceptible to economic contractions in the short term).

The economy clearly has made dramatic improvements in creating new jobs, but, for a host of reasons, as demonstrated by the chart, we are still significantly under the level of employment before the COVID pandemic hit.

To make this clearer, we can add together the private sector jobs and the public sector jobs to get the total number of jobs. This brings us Chart 5.

Chart 5 makes it a bit clearer just how many jobs were lost that have not yet been replaced (roughly six million, give or take).

Before the COVID pandemic hit, there were roughly 152 million people working in the United States. As of Aug. 18, despite a very strong recovery (record-breaking in some respects), there are now 146 million people working in the United States.

Let us now turn to output.

For a moment, ignore everything you know about terms like GDP, output, recessions, etc.

Imagine you live on a deserted island that happens to have a factory. You walk into the factory, turn on the machines, and you make 10 toys. You then walk outside and sell those toys for $10 each. The total economic output of your island is now $100 (10 toys sold at $10 each). That is otherwise known as the Gross Domestic Product (GDP for short). The only wrinkle is that some people don’t sell goods, they sell services, so we lump both goods and services together. And yes, again, there are an inordinate number of details in this calculation (some that are quite frustrating in fact), but let’s ignore those for now.

In the United States, we have a very sophisticated process for calculating the GDP, and it’s a number that is watched, predicted, and utilized quite heavily. This brings us to Chart 6.

Before the COVID pandemic, the real GDP peaked at just over $19 trillion. We then went through a remarkably harsh contraction down to a low of around $17 trillion, and then rebounded back to an impressive $19.4 trillion.

Wait a second, you say, jobs are still much lower than pre-pandemic, but total output is now higher than pre-pandemic! How can that be?

In a word: productivity.

We are, by definition, producing many more goods and services per worker. In fact, the scale is fairly remarkable: six million jobs have disappeared, and yet the economy is stronger than ever before.

It is worth recognizing this dynamic, for it likely has significant policy and strategic decisions for companies and employees worldwide. We, in aggregate (as proxied by the United States), produced more goods and services with less human capital during a time that forced us to heavily leverage technology, be innovative, and increase efficiency.

It is (as it always is) unclear what the rest of the year will hold, but we can be certain it will contain risk, it will often be illogical, it will produce moments of hope and triumph…and with any luck, it will produce more moments for observation, reflection, and learning.

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