AI Will Be The Catalysis For Huge Gains In Productivity. Maybe Too Much!

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Includes: AAPL, AMZN, BABA, FDX, GOOG, GOOGL, IBM, MSFT, TSLA, UPS, WBA, WMT
by: Michael Chandler
Summary

In an interview with Marie Bartiroma last week, Alan Greenspan stated capital investment and education were critical for productivity growth to be present.

Wage growth will not increase without increased productivity.

The labor force continues to shrink both here and abroad.

AI will be the game changer. McKinsey Global Institute study states 1/3rd of US jobs could be wiped out by 2030.

Invest in the AI sector for the long term.

The other day, I listened to an interview with Marie Bartiroma and Alan Greenspan. It seems his message is the same every time I hear him speak. One thing you can say about Dr. Greenspan, he is consistent. He stated capital investment and education were critical for productivity growth to be present. It concerned him greatly that these components were still lacking in our current economic conditions.

It was recently announced we had reached the point where we had more job openings than we had labor force to fill those positions. It’s amazing to me how we can have such a tight labor force but not experience escalating wage growth. Maybe wage growth will be offset by new innovation.

China recently announced that over the next 30 years they will lose about 20% of their labor force. They measure their labor force by those ages 15 to 64. Furthermore, they have made a tremendous investment in robotics in hopes to offset the loss in the labor force. Their intent is to be the AI (artificial intelligence) leader of the world by 2025. By the looks of pure demographics, they are forced to take extreme measures so that they may continue to have lower wage costs to ensure they remain one of the world's lowest-cost producers.

Some time ago, I wrote an article on AI and discussed how it had the potential to significantly increase productivity gains. It will be the catalyst to increasing productivity here in the United States and throughout the world. This is the one component that Alan Greenspan was adamant about.

The second component to Dr. Greenspan’s concerns was education. When combined with capital investment gains, higher wages are inevitable. My fear is that we are behind the curve when it comes to education, particularly in new technologies.

This week, I ran across this article done by a very reputable company, McKinsey Global Institute. Here is what they had to say: automation could wipe out 1/3rd of US jobs by 2030, with the greatest impact on jobs involving repetitive tasks.

Today we are going to take a closer look at those new technologies that I believe will be the catalyst for increased productivity, as well as those jobs that will be the most impacted by automation.

I stated in an earlier article we had lost our manufacturing base to overseas low-cost producers for many decades. We talked about the necessity of corporate tax reform to level the playing field, so we could once again be competitive and hopefully revive manufacturing here in the United States.

Further in that article, I stated the manufacturing jobs that would come back would be different than those we shipped overseas over the past few decades. In this article, I plan to show you how some of those jobs look now, as well as how they will look in the future.

My first example is of a little startup company in Vancouver, Canada, called Kindred. This is a secretive AI startup funded by venture capital from Google. The company has a group of people sitting in its corporate office maneuvering robotic arms at the Gap (NYSE:GPS) facility in Nashville, Tennessee, more than a thousand miles away. This arm’s primary function is to place product in boxes for shipment to Gap’s online customers. Please view the video at the hyperlink above. I promise you it will be well worth your time.

This technology will replace hundreds of thousands of employees in distribution centers throughout the world. Imagine the impact it could have on Amazon (NASDAQ:AMZN).

Speaking of Amazon, yesterday it announced the purchase of a company called PillPack. A few months back, Amazon had announced it would be moving into the distribution of pharmaceuticals. PillPack will provide packaging for individualized medications, much like it does in nursing home facilities throughout the country today.

By the way, Walgreens (NASDAQ:WBA) as well as many other pharmacies lost billions of dollars yesterday in market cap. Walgreens stock fell 10% by itself.

Amazon also announced it was selling delivery franchises to individuals that wish to distribute their product for as little as $10,000. This could have a significant impact on the likes of UPS, FedEx (NYSE:FDX) as well as the U.S. Postal Service.

Other retailers are busy too. Walmart announced (NYSE:WMT) yesterday it would be offering a 3D experience for shoppers online. In its video, the company showed an example of walking through an apartment where you can pick the accessories for decorating your home. Furthermore, Walmart has plans to build a virtual store where you will be able to shop for your groceries much like you do at its bricks-and-mortar stores. Microsoft’s (NASDAQ:MSFT) Augmented Reality Glasses could supplement the 3D experience for shoppers significantly.

With the aging population, there is another area where we will see a significant increase in AI, and that’s medicine. It has been well broadcast that we do not have enough doctors to meet the demand of the aging Baby Boomers.

Most areas of medicine will be affected, but some could be eliminated altogether. Diagnostics will change the most. For instance, IBM’s Watson can already read images more effectively than a radiologist (see link and video above). Robotic surgeries are being performed today by surgeons a thousand miles away. Doctor visits today are being done by use of software like FaceTime or Skype. As I write this article, I am wearing a watch which takes my blood pressure, O2 levels, as well as my heart rate. I own the cheaper model - the newer ones check sugar levels and can perform EKGs. Of course, it’s all linked to a software app that physician can access at their location.

Robotics can do many things in medicine, but when it comes to personal, compassionate communication, only a doctor or nurse can fulfill that task. AI can clearly replace diagnostics, diagnoses as well as care plans, but I don’t think I would like a robot giving me news of a terminal illness.

Make note that I have not bored you with the likes of Sophia, the human robot, or even driverless vehicles. We covered those quite extensively in my last AI piece.

As I said earlier, there are number of areas where automation will, in fact, eliminate the need for human labor. According to the McKinsey report, the following are the top 10 areas where jobs could very well be eliminated by machines:

  1. In agriculture, automation will clearly replace much of the physical work needed.
  2. Accommodation and food service are number two. You see kiosks everywhere today where you order your own food. Sheets, Applebee’s, Ruby Tuesday’s and many more offer these today. One of my favorite phrases to young folks turning away from furthering their own education is, “We will always need hamburger flippers”. Not today, though! Robots are even doing that now (see link).
  3. Construction is number three. Yes, here too, automation is replacing physical work.
  4. Manufacturing is number four. As you can see from many of the examples above, no real surprise here.
  5. Educational services - one of the greatest examples is getting your degree online. Homeschooling is now being offered in communities through online access.
  6. Retail trade is number six, primarily by way of data processing.
  7. Professional is number seven, and it includes attorneys, CPAs, financial advisors, and insurance agents, just to name a few.
  8. Retail trade again with an emphasis on human interaction. It appears that element is going the way of bricks-and-mortar and automated distribution.
  9. Management is number nine. It stands to reason that with fewer employees, fewer managers are needed.
  10. Information comes as a little bit of a surprise to me, but it rounds out our top ten. I guess it stands to reason. When I was in college, I use the slide rule for statistics; today you push a button. Machines today seem to gather the information we need. By the way, do our kids really need to know how to write cursive?

To summarize, my message is simple. According to Dr. Greenspan, productivity gains are about to explode to the upside, maybe to the extent that it costs us dearly in lost jobs. Then again, if we have a shrinking labor force as they do in China, the impact might very well be mitigated.

As far as education goes, we need to retool our labor force with the skills necessary to prepare for the onslaught of AI. It’s coming hard and fast, and we need to prepare ourselves for this new technology.

Finally, from an investment perspective, I would own Amazon, Google (GOOG, GOOGL), Apple (NASDAQ:AAPL), Alibaba (NYSE:BABA), and yes, even Tesla (NASDAQ:TSLA). Keep in mind, these names should be held for the long term and might very well have a bumpy road in the near term.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Investment advisory services offered through World Equity Group, Inc., member FINRA and SIPC, a Registered Investment Adviser. Dogwood Capital Management is not owned or controlled by World Equity Group, Inc.