Michael Zezas: The Great Productivity Race

As multinational companies look towards a future of higher innovation costs and a shrinking labor pool, some corporate sectors may fare better than others in the multipolar world.

----- Transcript -----

Welcome to Thoughts on the Market. I'm Michael Zezas, Global Head of Fixed Income and Thematic Research for Morgan Stanley. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about the great productivity race and the multipolar world. It's Wednesday, April 26th at 9 a.m. in New York. 

Client questions this week have focused on the U.S. debt ceiling, as Republicans in the House of Representatives work to pass their version of a debt ceiling raise. But we think this bill is just one step in a longer process, so we'll return to this topic when there's something more concrete to say about the ultimate resolution and its market implications. 

Stepping away from that topic gives us the opportunity to focus on a longer term trend impacting the markets, something our research team is calling the Great Productivity Race. It's the idea that U.S. multinational companies in particular will have to spend to develop and integrate new technologies, including artificial intelligence , into their production in order to keep up output. Why is that? In part, it has to do with one of our big three themes for 2023, the transition to a multipolar world. 

In a multipolar world, where the U.S. is looking to safeguard advantages and technologies and key areas of production, the labor pool for U.S. multinationals is contracting. Efforts to re-friend, and near-shore critical industries have strong political support. But this narrows the geographical options for companies making cheap labor, particularly for skilled manufacturing, harder to find. And that exacerbates a U.S. economic challenge already present for several reasons. That means companies are likely to invest in improving their own productivity through technology. And as our economists point out, there's historical precedent for this. 

For one academic study, the great Mississippi Flood of 1927 led many people to emigrate from some adjacent counties. Those areas modernized agricultural production much faster than others. Another academic study shows that conversely, metro areas that had a significant inflow of low skilled workers in the eighties and nineties were slow to adopt automated production processes. So investors need to know that some corporate sectors will be able to handle this well and others will be challenged. Those best positioned are ones less reliant on labor and with ample resources to invest in productivity. Those more challenged rely heavily on labor and have less resources on their balance sheets.  

Our colleagues in equity research are digging into which sectors fit into which category, and in a future podcast we’ll share with you what they're learning.