Executive Briefings

What Will Drive the Next Industrial Revolution?

With every presidential election comes a spirit of renewal (at least for those who supported the winning candidate). We're emboldened to look ahead, to renew our faith in the future, to reaffirm our belief that despite the occasional stumble, economic expansion will continue indefinitely.

But what if that's not true? What if the great capitalist miracle of the past century is sputtering out? What if future growth isn't inevitable after all?

A glance at our present plight could give rise to long-term pessimism. Over the last few decades, each succeeding recession has been followed by a longer period of recovery, and the crisis that struck with full force in 2008 was no exception. There's no question that the economy is in better shape now than in the trough of the Great Recession. But growth since then has been anemic; it was just 1.7 percent in the second quarter of 2012, while industrial production remains 3.9 percent lower than its pre-recession peak, and unemployment is still off by more than 3 percent.

The one bright spot is trade. U.S. exports and imports have "fully recovered," according to Jared Sullivan, economist with CBRE Econometric Advisors. A weak dollar and strong demand for U.S. goods have helped to grow exports by 58.6 percent from their recessionary lows, he told the Supply Chain Council at its annual Executive Summit in Indian Wells, Calif., this fall.

Economists aren't sure why recovery has been so late in coming. Sullivan theorized that the information-technology revolution is at least partly to blame. The productivity gains of the computer and internet age have reduced the need for companies to hire back workers, he noted, even as demand for their products has grown. And demand isn't that robust anyway; sluggish wage growth has kept consumption at below-average levels. Hiring is broad-based, but still slow. Cash-rich companies are afraid to start spending in a meaningful way.

How President Obama will work with the new Congress in his second term to solve these problems remains to be seen. The nation's budget deficit looms as the biggest monster to be slain. Currently it stands at an estimated 9.6 percent of GDP, "equal to periods of major wars," said Sullivan. An era of forced austerity seems likely, but lawmakers must be careful not to kill the nascent recovery in their efforts to slash government spending. A major test is how the President and Congress will deal with the "fiscal cliff" that was created by the 2011 budget deal, which mandates automatic, across-the-board cuts of $1.2tr over a period of nine years if Congress can't agree on a series of deficit-reducing measures.

Economists argue that recovery is just as inevitable as recession - that we pass from cycle to cycle, each with its predictable ups and downs. But Sullivan posed a worrisome question: exactly where will that next recovery come from? Since our nation's birth, we've been through three industrial revolutions, each of which propelled us to greater heights of prosperity. Are we due for a fourth? And if so, what will it look like?

Sullivan referenced a recent policy paper by Robert J. Gordon, an economist and professor at Northwestern University, writing for the Centre for Economic Policy Research. Tracing the three prior industrial revolutions (1750-1830, 1870-1900 and 1960-1990), Gordon advances the unorthodox view that economic growth might not be a continuous phenomenon. "The rapid progress made over the past 250 years could well be a unique episode in human history rather than a guarantee of endless future advance at the same rate," he writes.

Gordon backs up his assertion by noting that the third and most recent industrial revolution hasn't resulted in the kind of long-term productivity growth that was triggered by the first two. IR3, as he calls it, ended up delivering "diminishing returns," with annual growth of just 1.4 percent between 1972 and 1996. That compares with 2.3 percent per annum during the period of 1891-1972.

Productivity growth did soar to 2.5 percent annually between 1996 and 2004, but in the last eight years it has slipped back to 1.3 percent - and was just 0.5 percent between 2010 and 2012. The current stage of I.T. revolution is focused more on consumption - think of dazzling devices such as the iPad - than productivity enhancements, Sullivan said. The benefits of our last industrial revolution might already have been exhausted.

Where do we go from here? Gordon sees six "headwinds" that will push against the coming of a new age of economic prosperity. They include the imminent retirement of the baby boomers, a decline in the nation's educational attainment versus the rest of the world, rising economic inequality, labor outsourcing caused by the interplay between globalization and modern technology, costs associated with global warming, and ballooning household and government budget deficits.

All of these challenges could be met if we were to experience a fourth industrial revolution, with the scale and impact of the first three. Sullivan confessed ignorance as to what shape it would take. At the same time, his message wasn't one of total doom and gloom. "I don't think productivity gains are over," he said, citing the near-term promise of mobile technology and cloud computing in the corporate, medical and scientific worlds. What's more, "I.T. continues to have a huge impact on the logistics industry."

For now, the precise nature of an IR4 remains unclear. Sullivan tossed out several possibilities - nanotechnology, innovations in building materials, the adoption of cheap and renewable energy. But if it's anything like the first three, the next wave of innovation will come as a surprise to even the most far-seeing sage. The important thing is not to fall into the trap of declaring that all meaningful human and technological progress has come to an end. Even Gordon calls out past statements - most of them apocryphal, but still representative of our alarming lack of vision throughout history - about the birth of the telephone, sound pictures and computers. Just because we can't see the future coming doesn't mean it's not on the way.

Comment on This Article

Keywords: international trade, U.S. economy, global logistics, global economic outlook, recession, next industrial revolution

But what if that's not true? What if the great capitalist miracle of the past century is sputtering out? What if future growth isn't inevitable after all?

A glance at our present plight could give rise to long-term pessimism. Over the last few decades, each succeeding recession has been followed by a longer period of recovery, and the crisis that struck with full force in 2008 was no exception. There's no question that the economy is in better shape now than in the trough of the Great Recession. But growth since then has been anemic; it was just 1.7 percent in the second quarter of 2012, while industrial production remains 3.9 percent lower than its pre-recession peak, and unemployment is still off by more than 3 percent.

The one bright spot is trade. U.S. exports and imports have "fully recovered," according to Jared Sullivan, economist with CBRE Econometric Advisors. A weak dollar and strong demand for U.S. goods have helped to grow exports by 58.6 percent from their recessionary lows, he told the Supply Chain Council at its annual Executive Summit in Indian Wells, Calif., this fall.

Economists aren't sure why recovery has been so late in coming. Sullivan theorized that the information-technology revolution is at least partly to blame. The productivity gains of the computer and internet age have reduced the need for companies to hire back workers, he noted, even as demand for their products has grown. And demand isn't that robust anyway; sluggish wage growth has kept consumption at below-average levels. Hiring is broad-based, but still slow. Cash-rich companies are afraid to start spending in a meaningful way.

How President Obama will work with the new Congress in his second term to solve these problems remains to be seen. The nation's budget deficit looms as the biggest monster to be slain. Currently it stands at an estimated 9.6 percent of GDP, "equal to periods of major wars," said Sullivan. An era of forced austerity seems likely, but lawmakers must be careful not to kill the nascent recovery in their efforts to slash government spending. A major test is how the President and Congress will deal with the "fiscal cliff" that was created by the 2011 budget deal, which mandates automatic, across-the-board cuts of $1.2tr over a period of nine years if Congress can't agree on a series of deficit-reducing measures.

Economists argue that recovery is just as inevitable as recession - that we pass from cycle to cycle, each with its predictable ups and downs. But Sullivan posed a worrisome question: exactly where will that next recovery come from? Since our nation's birth, we've been through three industrial revolutions, each of which propelled us to greater heights of prosperity. Are we due for a fourth? And if so, what will it look like?

Sullivan referenced a recent policy paper by Robert J. Gordon, an economist and professor at Northwestern University, writing for the Centre for Economic Policy Research. Tracing the three prior industrial revolutions (1750-1830, 1870-1900 and 1960-1990), Gordon advances the unorthodox view that economic growth might not be a continuous phenomenon. "The rapid progress made over the past 250 years could well be a unique episode in human history rather than a guarantee of endless future advance at the same rate," he writes.

Gordon backs up his assertion by noting that the third and most recent industrial revolution hasn't resulted in the kind of long-term productivity growth that was triggered by the first two. IR3, as he calls it, ended up delivering "diminishing returns," with annual growth of just 1.4 percent between 1972 and 1996. That compares with 2.3 percent per annum during the period of 1891-1972.

Productivity growth did soar to 2.5 percent annually between 1996 and 2004, but in the last eight years it has slipped back to 1.3 percent - and was just 0.5 percent between 2010 and 2012. The current stage of I.T. revolution is focused more on consumption - think of dazzling devices such as the iPad - than productivity enhancements, Sullivan said. The benefits of our last industrial revolution might already have been exhausted.

Where do we go from here? Gordon sees six "headwinds" that will push against the coming of a new age of economic prosperity. They include the imminent retirement of the baby boomers, a decline in the nation's educational attainment versus the rest of the world, rising economic inequality, labor outsourcing caused by the interplay between globalization and modern technology, costs associated with global warming, and ballooning household and government budget deficits.

All of these challenges could be met if we were to experience a fourth industrial revolution, with the scale and impact of the first three. Sullivan confessed ignorance as to what shape it would take. At the same time, his message wasn't one of total doom and gloom. "I don't think productivity gains are over," he said, citing the near-term promise of mobile technology and cloud computing in the corporate, medical and scientific worlds. What's more, "I.T. continues to have a huge impact on the logistics industry."

For now, the precise nature of an IR4 remains unclear. Sullivan tossed out several possibilities - nanotechnology, innovations in building materials, the adoption of cheap and renewable energy. But if it's anything like the first three, the next wave of innovation will come as a surprise to even the most far-seeing sage. The important thing is not to fall into the trap of declaring that all meaningful human and technological progress has come to an end. Even Gordon calls out past statements - most of them apocryphal, but still representative of our alarming lack of vision throughout history - about the birth of the telephone, sound pictures and computers. Just because we can't see the future coming doesn't mean it's not on the way.

Comment on This Article

Keywords: international trade, U.S. economy, global logistics, global economic outlook, recession, next industrial revolution