(Bloomberg Businessweek) -- In the belly of a machine about the size of an office printer, a plastic roller presses sticky rice onto a bed of seaweed. The oxygen-to-grain ratio has been precisely calibrated with the aid of X-ray tests. A razor slices the sheet into a flawless rectangle, which plunks down onto a steel tray ready to be stuffed with ruby-red tuna or smoked eel.
The $14,000 robot can help a food prep worker churn out 200 sushi rolls an hour—up from the 50 or so a chef could make by hand, according to Autec USA Inc., the Torrance, Calif., company that sells the machine. Chief Executive Officer Taka Tanaka says orders have quadrupled over five years amid rising sushi consumption and a growing chef shortage. Among his customers are Whole Foods Market and Sushirrito, a mini-chain of restaurants that specializes in a burrito-sushi amalgam.
Service industries have lagged other sectors in spending on labor-saving equipment during this economic expansion, because as long as workers were plentiful and wages stagnant, it made more sense to hire than to invest in automation. As U.S. labor markets tighten, the calculus is changing. “You’re investing in capital because you grudgingly have to pay workers more,” says Carl Riccadonna, chief U.S. economist at Bloomberg.
Analysts at Morgan Stanley expect a pickup in capital investment in services, which span luxury retail to internet services, to carry over into next year. That bodes well for worker productivity, which has been depressed for a decade but began showing signs of life sometime around midyear. If the improvement is sustained, it could boost the growth potential of the U.S. economy, lead to raises for workers, and even allow the Federal Reserve to lift interest rates more. Stronger productivity is “the salve for everything,” says Ellen Zentner, chief U.S. economist at Morgan Stanley. “It’s something that has been sorely needed in the U.S., and it is finally here.”
Goldman Sachs Group Inc. economists wrote in a November note to clients that capital outlays across all sectors have been the “brightest spot” in gross domestic product data and that they expect spending to continue to “modestly outperform” compared with its usual rate this late in an expansion. Their optimism is partly grounded on the expectation that the corporate tax reduction and other investment incentives contained in the tax plan that could soon pass Congress will provide a further moderate boost.
Services look poised to remain the star performer. They make up a growing share of the economy—64 percent of gross output last year, up from 40 percent in the 1950s—but their share of capital expenditures has been relatively flat over time. A Morgan Stanley analysis of 1,500 publicly traded companies found that many businesses are going beyond replacing old equipment. They’re also pouring money into new technology, along with buildings and production equipment. U.S. Department of Commerce data show that for the first time since 2000, investment in intellectual-property products (think software, as well as research and development) has surpassed 4 percent of GDP.
Surveys of corporate managers suggest capital outlays could remain robust into 2018. The Morgan Stanley six-month capital expenditure plan index is holding at levels last seen in 2006.
Nevertheless, productivity gains are happening in the context of diminished expectations. Efficiency has increased by an average 1.5 percent this year, and Morgan Stanley expects it to settle into a pattern of just above 1 percent in the future. That’s far below the 2.7 percent it averaged from 2000 to the eve of the Great Recession.
To nudge the dial toward historical norms, the capital spending pickup would have to mirror the scale of investment U.S. companies were making in the 1990s, according to J.P. Morgan chief U.S. economist Michael Feroli, who thinks that’s unlikely. What’s more, Feroli sees demographic changes weighing on productivity as a large generation of experienced older workers exits the workforce. “You have the baby boomers leaving, and they’re generally pretty skilled at this point,” he says. As of 2016 about 6.8 percent of the country’s population was 50 to 59 years old and headed toward retirement soon.
On the bright side, even a small pickup is good news for the Fed. If the economy has more productive capacity, interest rates can rise higher and the economy can expand faster without coming up against supply constraints that cause inflation to spike. That’d be a relief for policymakers, who are already concerned about how they’ll fight the next recession in a world where interest rates are at historical lows.
Efficiency improvement could also allow companies to pay workers more without taking a hit to profits. “Productivity growth has really been dismally slow in recent years,” Fed Chair Janet Yellen told lawmakers during testimony on Nov. 29. “I think to really see a faster average pace of real wage growth, we need faster productivity.”
Any uptick could be global. Citigroup Inc. reckons 2017 is shaping up to be the first year since 1995 in which the U.S., the U.K., Japan, and the euro area all witnessed accelerating productivity.
Tanaka expects demand for his robots to stay strong. His most popular machines are an example of the kind of automation that can make life easier for workers—rolling out rice over sheets of nori is one of the most difficult, and tedious, parts of sushi making—rather than make them obsolete. Customization—inserting different kinds of filling—still requires humans. “It’s half-automated,” Tanaka says. “People can still be entertained by watching the chef.” —With Matthew Boesler
To contact the author of this story: Jeanna Smialek in New York at jsmialek1@bloomberg.net.
To contact the editor responsible for this story: Cristina Lindblad at mlindblad1@bloomberg.net.
©2017 Bloomberg L.P.
