As we wrap up celebrating Independence Day, it is a great time to discuss what lies ahead for Americans.
Some are saying the U.S. will remain the superpower it currently is, while others think our century may be over and China is positioned to take the title.
McKinsey recently published a report on global wealth, stating that $48 trillion of U.S. wealth is on the line this decade—a number that isn’t exactly optimistic.
Since the Great Recession, investment returns or “paper gains” seriously outpaced the actual economic productivity of the United States. That is not sustainable in the long term—there is a good chance it will change.
McKinsey’s report outlined four scenarios for the U.S. Each scenario portrays a different outlook for the nation’s wealth and productivity, and we think two of them are most likely to happen.
Today, we will look at all four scenarios and explain what each might mean for enterprises, both on a macroeconomic level and for the future of work.
Scenario One: Paper Gains, Slow Economic Growth
The first scenario is a continuation of the last 15 years. That means more paper gains for investors while the economy slogs along with low growth.
This is possible, although not ideal. It means we are kicking the need for reinvesting down the road.
With slow growth, interest rates will return to the historically low levels of the 2010s, and that will boost valuation multiples, sending the market higher.
Companies’ lack of willingness to invest in this scenario also means subdued revenue growth. They will instead continue to only prioritize operational efficiencies and cost cutting, as opposed to chasing sustainable long-term growth opportunities.
Unlike the boom times in job creation we’ve seen over the past two years, it is likely that workers’ pricing power for their hours will be weakened. Hourly wage growth will slow, and the benefits of full-time employees—versus independent contract work—will continue to weaken.
Scenario Two: High Inflation Strengthens the Economy, while Asset Prices Suffer
The second potential outlook for the coming decade is a high inflation scenario like the U.S. saw in the 1970s. It foresees a strengthening of the economy while asset prices suffer.
Again, this is possible. But inflation has already started to come down. We think the current timeline is much closer to the late 1940s, where an inflation surge calmed quickly, and not the 1970s. That makes this outcome less likely.
If it were to occur, however, a stagflation environment would cause both investors and the economy at large to suffer. Valuations would decline, and weak growth and rising prices would mean less investment. Corporations would see limited real revenue growth and margin compression from input inflation, without the ability to raise prices to offset inflation due to weak demand.
It would also be a worst-case scenario for the workforce.
Workers would be fighting to maintain their wages, but with low growth they would have limited pressure to push management to meet their demands.
Employees would suffer from real wage declines as well. And independent contractors could struggle to find more regular work in an uncertain, stagnant environment.
Scenario Three: “Japanification” Causes Stagnation and Shrinkage
The third looming potential outlook for the U.S. is something we’ve already seen play out elsewhere in the world: the Japanification of the U.S. economy. In this scenario, investments and the economy would completely stagnate, and companies would shrink.
This happens when capital is tied up in unproductive uses and no one wants to admit the problem, so growth slows. With weak growth comes deflation.
Low corporate returns limit growth investment, making revenue growth hard to find. Companies with significant debts and unproductive assets won’t have the flexibility to innovate and spend.
A core part of Japanification is not just stagnant investment capital, but human capital stagnation as well. With companies not going under and creative destruction perpetually deferred, the salaryman remains strong. An employee’s job isn’t at risk, but companies afraid to paint outside the lines may shun the benefits of a flexible independent workforce.
However, a healthy respect of the cycle of creative destruction is rooted in the DNA of the U.S. economy. While this sounds like a scary outlook, we think it’s unlikely to happen in the U.S.
This brings us to the fourth and final potential outlook for the next decade and beyond.
Scenario Four: A New Golden Era
The last scenario is the “golden” one. It is the scenario where we have a productivity boom and actual economic productivity drives the market higher.
McKinsey compares this scenario to a post-World War II economic boom.
The supply-chain supercycle will be a huge factor in making this scenario a reality.
As colleagues have written recently, this is a strong potential outcome. Construction spending is booming, and we think it can keep driving higher for years.
With companies investing in infrastructure and supply chains, and the government supporting them, the path of GDP growth is visible.
McKinsey highlights that while this will lead to more GDP growth, it will also lead to less wealth creation. Inflation will be slightly higher, so multiples will not expand as much. Even so, this is the ideal scenario for positioning the U.S. for long-term wealth creation.
In this environment, the trickle-down benefits of productivity and innovative growth mean companies will be consistently investing and seeing strong revenue growth.
And this positive outlook is great for workers of all stripes. With investment booming and growth strong, the need for a flexible workforce will be essential. Companies will seek out full-time workers along with independent contractors—a powerful force-amplifier.
Of course, a lot can change over time, so even though we think the fourth scenario is the most likely one, the data will guide our conclusions.
That said, in the near term, it shows how important it is for us to focus on and invest in our real economy. This investment will lead to a winning environment for all workers and the economy as a whole.
As the government and companies ramp up investments in facilities, roads, bridges, and other kinds of infrastructure, the country will become more efficient in production and supply chains.
That is why we continue to be so bullish on the supply-chain super cycle. The country’s long-term wealth and economic health depend on it.