Nela Richardson, chief economist of ADP, shares her thoughts on what's in store economically for the year ahead, what accountants should be worried about, and why the new normal will be anything but normal.
Transcription:
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Dan Hood (00:02):
Welcome to On the Air With Accounting. Today I'm editor in Chief Dan Hood. As we emerge hopefully from the end stages of the pandemic and we head into an election year, all eyes are on the economy and what it's going to do here to talk about all that, to give some sense of what might be coming down the pike over the next 12 months or so, is Nela Richardson. She's the chief economist of payroll and HR services, giant, A DP Nela. Thank you so much for joining us.
Nela Richardson (00:23):
Thanks for having me. It's great to talk to you, Dan.
Dan Hood (00:26):
Yeah, and this is a great big topic, and obviously we will not hold you responsible for any predictions or things like that, but we just want to get a sense of what's going on, what we should be looking about in the year ahead. Last year, at the end of the year and the beginning of last year, we were sort of super worried about the economy and it felt like we were headed in for significant inflation or maybe major problems. It doesn't feel as disturbing as it did then. Is that the general feeling that the economy is in less parlous shape than it was maybe a year ago?
Nela Richardson (01:00):
You know what, I think Dan, I think people are just giving up predicting because if you think about it in 2022, in January, through almost the end of that year, 2023 could have been the recession year if you to a lot of the commentary it was anything, but we're going to finish 2023, upwards of 3% annualized economic growth. And so coming into 2024, I think people just don't know what to make of this economy. This growth has been surreal and we're not sure what's giving it gas anymore. At first, we could have looked at fiscal spending because that was a huge driver of the recovery, but that has pretty much dried up. You could look at business dynamism and I think that's still there. We know that companies continue to hire, but we're also starting to see little splinters. You've heard these big layoffs from companies in January. We've seen manufacturing really be in a stalemate and not adding a lot of new jobs, so a virtual or recession. So the question is where's the growth going to come from? I think it comes from the consumer. Of course it always comes from the consumer, but will the consumer be aided by strong labor markets? Right now with unemployment at 3.7%, we have a super strong labor market, so it looks like at least for the next few months that are visible, it looks like 2024 is going to be another good year.
Dan Hood (02:33):
Excellent. Well, fingers crossed, obviously, and again, no one is responsible for past performance. There's no indication of future returns, but it is still, as you say, it's fascinating because things are so weird. I mean, times are really strange. We've talked about this in the past, in other contexts, but it is just things are weird.
Nela Richardson (02:53):
So this is the subject of my next blog that's going to come out as what is normal because people keep referencing the 10 years of expansion that we just came out of as going back to normal. That was so super abnormal. Historically speaking, 10 years of expansion. It's never happened in the history of the US recessions happened every three to four years, and it was aided by two really abnormal things, rock bottom interest rate and super, super low inflation. Fast forward to 2023, we hope we see that inflation is going down, but will it go back down to 2% or less? That's the question. And these rock bottom interest rates, are they a thing of the past? Because even if the federal start cutting, cutting back down to 0% in the US, I think is unlikely. Right?
Dan Hood (03:45):
Right. Well, and as you say, that's one of those weird things that for a decade of a decade of expansion is unusual, but so was we had 30 years of extremely low inflation, right? Basically, I don't want to say it wasn't zero inflation, obviously, but it was so low that people stopped paying attention to it. Whereas even up into the mid eighties, we were super concerned about inflation. It was a big deal and suddenly we just hadn't had it. And to face it again, as everything's out the window, no knows what's going on. It's crazy. That's the end of our podcast. Thank you all for joining us. Basically, no one knows head for the hills, buy mattresses to store stuff in. No. Well, it is an excellent point to bear in mind at all times that things are unusual and so on, and that we can hope that this year we'll be good, but maybe we should think about what are some of the trends that we should be paying attention to as we go forward? Predictions are out. We're not asking for those, but just a general sense of as we go forward, what are the things that might destabilize things? What are the things that might keep things on track?
Nela Richardson (04:45):
So Dan, I would call it, it's unusually strong and that sense, it's interesting, but I think what we can point to if we remove the task of predictions and we just look what is actually going on in today's economy right now, which is what I try to do as an economist to provide a real time view of what's going on in the labor market, you can see that there is both pockets of strength and pockets of weakness, and when netted out, you get overall pretty solid economy. So here's what I'm looking at. I'm looking at first what sector is going to lead job gains in 2024? If you look at the last two years, growth has been led predominantly in leisure and hospitality. These are jobs that are on site. What we're seeing here at a DP is that more and more that job growth, more and more of it was part-time work.
(05:41):
So yes, we got more jobs gains, but they were part-time jobs, which translates into lower labor activity. Overall, more people were working, but they were working less. Will this trend continue in 2024? That's one question. The second question is if leisure and hospitality has pretty much recovered, they took the hardest hit from the pandemic, if they pretty much recovered and they're going back to more trend growth, then what sector rises to produce what was the latest BLS number 353,000 job gain? What sector is going to help do that? Well, right now it looks like care, health assistance, nursing, the medical field is providing a lot of those gains. Remember, this is a sector, but it's not as much affected by interest rates. Well, is the hiring in healthcare for example, going to be strong enough to replace the growth driver of leisure and hospitality? And so that's an open question. But within those sectors, we also have, again, pockets of weakness manufacturing. But also if you start looking at white collar jobs, this is what's been interesting. You're starting to see companies starting to pull back on some of that hiring and professional services and information technology and banking. And if that carries out, we're going to get this mix of jobs that may be more part-time, lower paid jobs, fueling job gains in 2024, a little bit different picture than what worked for 2020.
Dan Hood (07:28):
Right. Well, I love that the comparison of the Legion hospitality as a driver of growth for the past couple of years, but in some senses, a lot of that may have been the result of them coming back from the pandemic 2020, huge layoffs and huge, just lots of people sent home. No one was going to restaurants if that's recovered. But then you look at, but healthcare, as you talk about healthcare is this sort of the beginning of a wave of, wow, we've got a million baby boomers who need care and they're all starting to retire and getting to, I mean, we think is there potential for that to be a really long-term driver?
Nela Richardson (08:04):
There is a potential, at least for the demand side, because you're absolutely right. This is an aging population, and the more we have those retiring baby boomers who are wealthier as well and demand health services, there's going to be demand for medical professionals. They also took a hit during the pandemic because a lot of optional services like dental care for example, were put off during the pandemic. There were layoffs. So they're both recovering, but they're also reaching forward and growing because of this population shift. But the question there again, might be one of supply, are we getting enough young people going into this field? This is something I am sure you can identify and sympathize with because we're not seeing the same inflow into the nursing and healthcare professions that meet the demand. And that's going to be a place of real labor shortages, which in my world translates to still high wage growth,
Dan Hood (09:04):
Right? Yeah. There are apparently no young people anywhere, apparently. I don't know where they've gone. Maybe they're all in astro. They're going to the moon
Nela Richardson (09:15):
Technology. My teenagers, they're going to be gamers or influencers.
Dan Hood (09:20):
Influencers, right, exactly. We're going to have 30 to 45 million gamers and influencers, and it's interesting. Be well supplied. Well, hopefully that will drive wages down in that sector to the point where it's less attractive and people will start going back to nursing. But nursing in all kinds of care have had terrible staffing problems for a long time. That's been particularly at the skilled ends of those, that's been difficult for a long time. I'm going to make a long-term prediction. This is a bold, long-term prediction that in 30 years there will be a big problem of huge overcapacity in healthcare when the last of the baby boomers finally disappears and there's far fewer Gen Xers demanding care and demanding stuff like that, they're going to find themselves with huge overcapacity. But that's a long-term prediction, and I hope to be dead before anyone can check me on it. I'd
Nela Richardson (10:11):
Love to. Well, let's meet for coffee and check that prediction. That would be great.
Dan Hood (10:15):
Exactly. I can only assume this podcast will not still be going on, but if it is, we'll discuss here. But I love talking about the individual industries because obviously our audience, primarily all accountants and they're serving all these industries, so they have a chance from these things to go to their clients and say, Hey, you should be worried about this or thinking about this, or this is an opportunity or this is a threat. And I wonder if we could maybe dive a little bit more into that as sort of hurdles and issues and obstacles that accountants can maybe be talking to their clients about as they look at the year to come.
Nela Richardson (10:45):
Yeah, I think accountants serve a really great strategic partnership focus. And so first of all, it's going to be about labor shortages more generally. It's a cooler labor market. It's easier to hire, but that doesn't mean it's easy and the skills may be missing in pockets, and so it's going to be still a challenging to find qualified workers even in the labor market. So what works in terms of finding them? Well, one, you don't have to worry so much about the great resignation, peeling, peeling them off. That trend has gone. There is no remnants that the great resignation is going to take off again. In fact, if you look at a DP data, we've seen the lowest premium from switching jobs then we've seen in four years. So let me just break that down a little bit. We have a 10 million monthly sample of individuals that we can track in a randomized, anonymized way uniquely through time.
(11:56):
We're basically comparing the pay of an individual with his or herself, not with a cohort. That gives us a really robust indicator of wage growth. And what we've seen is that the premium for switching jobs on average has shrunk to below 2%. This time last year it was above 7%. So that trade off of getting more pay just by switching is really disappearing. So that means that one, it's probably a little bit easier to find talent, but it also means that your talent, it might be a little bit harder to restructure talent that people aren't just leaving. They used to be. So it puts the employer in an interesting middle ground here. The labor market is stabilizing. That's good for productivity and for teams wages growth is coming down, but it's still a little probably more challenging in this market to find a qualified employee than it was perhaps five years ago. So you have to hold all of these things. A second thing though that works is that now you have this new lever that wasn't there before in terms of remote and flexible work. So it's not just about paying people more, it's also about giving them more flexibility and time. Some workers are really willing to trade off higher pay for more flexibility, and if you're in one of those industries that can deliver that benefit, that's an option for you that may not have been available before the pandemic in the same way.
Dan Hood (13:34):
Awesome. Very cool. I want to dive into all of that, particularly the things about trends in terms of getting new staff on and finding new staff and all that sort of stuff, but we're going to take a quick break before we do that. Alright, and we're back with Neil Richardson from a DP. We're talking about the labor market, we're talking about trends for the economy for 2024, and we've been focusing on the labor market just before the break. So I want to come back to it and talk about, it was interesting. You talk about the jump bonus being having decreased significantly, right? I think you said from above 7% to just around 2%. Did I have that right? Something
Nela Richardson (14:14):
Like that. A little bit less. Yeah. Yeah, yeah, that's right.
Dan Hood (14:16):
So do we have a sense of what's driving that is that people are less panicked about the great resignation or because we kind of see that it's over and so they're not just automatically offering huge salaries or is what might be driving that? Do you have any sense?
Nela Richardson (14:30):
Well, the labor market has cooled, so it was so red hot, it was like Phoenix and now it's like San Diego. It's still pretty solid. It's still pretty stunning, but it's not over a hundred degrees anymore. And I think that's actually good for companies because it's hard to say have productive teams if members are constantly turning over. So we've seen that turnover rate really slow down. That's in keeping with government data on a slight cooling and job openings. They popped up again, the slightest read in November. But overall, the trend has been for fewer job openings. So companies are hiring, but they're hiring less than what we see at a DP because we uniquely break this out by firm size, large companies that have pulled back quite a bit from their hiring relative to a year ago. So those trends have helped mitigate because large companies were also the ones that were able to make those big jobs.
(15:33):
Smaller companies were harder. It's harder to increase pay. And so what we saw throughout the recovery is that small companies were really at a disadvantage compared to large companies because they couldn't always keep up with this pay growth. And it wasn't until larger companies started to pull back that we felt smaller firms may gain. Now they're kind of standing shoulder to shoulder wage growth between small and large firms are starting to level out and the differences are getting smaller. So they're almost like equal competitors in terms of the quest for talent, and that's the good news for smaller,
Dan Hood (16:13):
I don't want to, no one here is going to use the word collusion between small firms and small businesses and large businesses to drive down wages and keep the worker suppressed. I didn't mention we're switching now to a fully Marxist viewpoint on the podcast. That's where we're from now on. But no,
Nela Richardson (16:29):
You call it Luc. I call it the invisible hand of the market.
Dan Hood (16:36):
Potato. Potato as they say, no fresh. Right. I think it's good. It's good for a lot of reasons that red hot market sort of cooled down a bit. But I was curious, you talked about the remote work aspect of things. Have you, and this wasn't a question we talked about, but has anybody seen any play of the ability to hire people remotely from anywhere in the country or anywhere in the world? You can hire someone and have 'em work for you. They don't need to be within your 90 mile radius or whatever it is. Has that had any role in mitigating wages or having any impact on how labor markets form and how prices are set and salaries are set in terms of like say, well, if I can hire somebody from Maine and I'm in New York City, salaries in Maine in theory should be significantly lower. Has it played any role in changing that either way? Was it raised wages in Maine or lowered wages in Manhattan kind of thing?
Nela Richardson (17:32):
Yes, I think you can start to see both changes happening now. Everyone points to gen ai. It's the game changer, artificial intelligence as the game changer for the labor markets, but for sure in the future. But here and now, the widespread adoption of remote work is a game changer. We can see that in our own data at a dt. Now, remote work is hard to capture because you can be remote and literally live across the street from your office building and just never go in it. Or you could be remote and be far away. You could be in a different country. You could be on the moon, I guess a remote worker. Anyway, pressing that too far. So the way we measure it is we're able at a DP through our HR systems to look at teams, and we can tell, again, in an anonymized way whether the team is virtual or remote.
(18:31):
So one way we measure remote work is whether a worker works in a different metro area than their manager. I, for example, work in the same metro area as my manager. We could meet for coffee, but more and more increasingly people, so in 2018, before the pandemic, about 20% of the US workforce worked in a different metro area than their manager. And for short years, that number went from roughly 20% to over 31%. That's a 10 percentage point increase in less than four years. That's remarkable. So almost a third of the US workforce is working according to our analysis in a different metro area. Here's another interesting fact though, that goes right to your question. The premium of remote workers is going down as well. Before the pandemic remote workers were typically older, and they were typically knowledge workers. So think software developers after the pandemic workers in the same Well, what that meant was these remote workers did make more money than their teammates. Their teammates from the same team. There was a premium after the pandemic. We've seen that the premium has gone down and the fastest growing segment of remote workers is 25 to 30 plus. So remote workers, they're becoming younger and they are lower paid relative to the rest of their team. So this is really a change in the demographics of remote work, which we don't talk about.
Dan Hood (20:09):
Yeah, no. So just to be clear or to check on this, the 20% that were free, 2018, it's not that their wages have gone down that we know of. It's really just this new cadre of they say 25 year olds and up who are joining, who come with lower salaries into the pool. Is that
Nela Richardson (20:30):
Exactly, that's a great clarification. The composition of remote workers has gotten younger, so there's more younger workers working remotely now than there used to be, and they make less money. So the overall wage premium has gone
Dan Hood (20:44):
Down. But as you say, 10 percentage points, that's enormous. I have to say, I'm sort of surprised that it was as high as 20% pre 2018 and why wasn't I part of that demographic?
Nela Richardson (20:56):
Well, that's because 60% of jobs can't be done remotely. And that's really interesting too. This is not a full market participation though. I think even onsite work has changed work arrangements in order to increase flexibility. So maybe you are in a business that you have to be onsite, but there's different things you can do with shift work, different hours, more flexibility, more time off for appointments and for childcare issues. And what we've seen is that companies are adopting those practices even if you have to be onsite,
Dan Hood (21:33):
Right? Because the onsite workers are talking to the remote workers and they're saying, why can't I do that? And
Nela Richardson (21:40):
Vice versa. Then you have a career like nursing where we track how nurses have transitioned over the pandemic. We've seen that older workers are leaving the profession. Actually, the tenure of nurses has shrunk over the last few years as well. And we can track where the nurses go, where do they go? They go into office jobs, they go into professional and business sectors. So you can see that transition of the onsite worker to maybe a remote, at least a remote friendly job. It's not a remote job.
Dan Hood (22:12):
That's fascinating. And this is, as we say, just the time where work. I'm expecting that to be huge for 30 years and then stop. But again, we need to discuss that in 30 years. I'll send you a calendar invite for 2053. I want to just briefly talk a little bit about accounting, because it has, and we talk about cooler labor market. The labor market and accounting is whatever the rest of the economy is, it's much worse, right? So if unemployment, I think you said 3.7%, was that right? Did I get that in general? I mean the assumption right for accountants that the unemployment rate within the profession is much, much lower, making it obviously much, much, much harder to hire with an accounting. Do you any, you mentioned a couple of things like using remote work as sort of a benefit to say, listen, you can work when you want. You can set your own things. Are there other tips, tricks, strategies that accountants can use maybe to handle this incredible, these apocalyptic levels of staff shortages?
Nela Richardson (23:14):
Yeah, I mean, this is a hard one because young people aren't going into the accounting field at the same rate. So it's a long term struggle. It's not something that you can change overnight. And business operations are set around certain dates that are really important in the accounting profession, and it's hard to get around that as well. But I think inroads can be main in terms of retention and engagement. So one inroad is maybe flexibility during key times is very difficult, but the ability to have more part-time workers, what we've seen is that there seems to either be more of a demand to work fewer than 40 weeks or an offering there. And maybe that's a way to increase engagement. What we've seen other workers do is to treat members of your company that leave not as a closed door. The exit interview really called an exit interview.
(24:16):
Maybe we should rename that. Maybe it should be more of a revolving door. In fact, I was on a call with A-C-H-R-L of a huge global consulting firm, over 300,000 workers worldwide. And their idea was to create basically a Rolodex of former employees that they could reach out to. Maybe they're retired. You have all these baby boomers who are retiring. Maybe it's not a goodbye to those baby boomers. Maybe they're willing to pitch it in key parts of the season. So having that active Rolodex of calling people when you need them to fill in those gaps could be desirable globalists who've left, but want to stay involved in their profession. There's only so much golf and babysitting for grandchildren that you can tolerate, but also good for companies who are trying to make this transition to get more people in the field.
Dan Hood (25:11):
Right. That's a great idea. I mean, I've heard of a couple of firms, not as many as need to, but a couple of firms where their marketers, for instance, will include anybody who leaves the firm will keep them on their marketing list so that they're up to date on what's going on with the company. And then they can always, as you say, when they need help, reach out to them, but nowhere near enough firms do it. It's a great idea. I want to talk, you mentioned generative ai and I wanted no conversation these days is complete without some reference to artificial intelligence. So I wanted to take a second, and accountants I know are paying a lot of attention to ai, as is everybody in the entire world. But do you have any sense of, and I realize this is a huge, huge question, but just maybe a sense of how AI might impact the workforce. It's huge. I realize, take all the time you need.
Nela Richardson (26:00):
I think what's interesting about the new developments in ai, because AI is an old term. It was developed in the 1950s, so it's not like it's new. But what's new here are these neural networks that have been combined with AI to create large language processing models that enable whole systems think the internet platforms in which you can build technology on top of. That's what makes it new. And the fact that these systems learn by prediction, by taking what's known as tokens, a series of tokens, and predicting the next token. So for a sentence, they take a pledge of words and predict the next word for numbers. They take a bunch of numbers in a series and predict the next number, and so they actually have the ability to learn from themselves. That's great, but it requires a lot of high quality data. And so we're all going to be talking about the social and societal ramifications of that.
(27:05):
But in terms of the actual role of a worker, I think we're just at the beginning of what that looks like. There's a long road ahead, and it's not going to be the role. It's not going to be like, oh, we're going to get rid of all the economists on the planet. Don't get look so excited. People can't see your faces here, but we're not going to get rid of all the economists just by the skin ai, but we're going to change specific tasks. What tasks can this program do that Nila no longer has to do, and how much of my role can be put off through Gen ai? So if you think about your role, if you have a role with a lot of diverse tasks, it's going to be really hard to be replaced. A great canonical example is a truck driver. Yeah, a truck driver.
(27:59):
First of all, it's something that you're in a vehicle and you have to do, but if Gen AI could actually drive a truck, if you could have a driverless truck, think of all the different processes and tasks, you have to stop. You have to get gas, you have to know when to swerve, know when to switch lanes. You have all of these paths added up, makes a truck driver very hard to reproduce. And that's why we've seen a delay in a driver with vehicles. We thought that was going to be the trend that was going to spark all kinds of innovation that's stalled because there's too many tasks associated with it, and they have huge risks. You get them wrong. So I guess my takeaways are here. So I'm thinking about jobs that will be replaced, think about tasks that will be replaced or augmented or changed in some way. And the jobs that change the most may surprise you. Not the truck driver, but maybe the lawyer. And that's going to be kind of a different mindset. The way that our partners at Stanford Digital Economy Lab, which have been at the forefront of ai, have described it to me is it's not that AI replaces all lawyers. It replaces lawyers who don't use AI with lawyers who do use ai.
Dan Hood (29:19):
Right. Yeah, I mean, I think that's a great point. That seems to be the revelation that's coming is right. It's not that AI is not something we don't have control over. We run the computers. We couldn't take advantage of it. As you say, we can use it before it has a chance to replace us. So that's great
Nela Richardson (29:39):
Advice. It could be just the calculator in your backpack, proverbially speaking, it's a tool, it's a hammer. Hammers have no power unless they're used. And I think that for business operations, businesses are very focused on creating the right domain of knowledge to use the tool. You don't want to have gen AI just kind of run amuck in your business operations. No business is going to allow for that to happen without serious ramifications. So it's about understanding the tool and how to make your workers more efficient by using it
Dan Hood (30:18):
All about getting out there and getting ahead of it before it makes you do things. Make it do things. There you go. Alright, well luck. This is a very hopeful and positive and forward looking conversation. I'm coming out of this, there's some issues, but generally speaking, I feel better than at this time last year. So Neil Richardson, thank you so much.
Nela Richardson (30:37):
Thanks for having me, Dan. Always a pleasure to speak with you.
Dan Hood (30:40):
Yeah, that's great. And thank you all for listening. This episode of On the Air was produced by Accounting Today with audio production by ad dot con. Ready to review us on your favorite podcast platform and see the rest of our content on accounting today.com. Thanks again to our guest and thank you for listening.