Thursday, March 28, 2024

Many Winners and Losers from Generative AI

Perhaps there is no contradiction between low historical total factor annual productivity gains and high expected generative artificial intelligence revenue impact; productivity impact or profit impact for some firms in some industries. 


Keep in mind that total productivity changes include effects from all sources, not just information technology. So unless you believe IT was solely responsible for total productivity change since 1970, the actual impact of IT arguably is rather slight, perhaps on the order of 0.5 percent up to about 1.5 percent per year, maximum. 


And those years would include the impact of personal computers, the internet and cloud computing, to name a few important information technology advances. 


Industry Sector (NAICS Code)

Description

Percent Change in Labor Productivity (2022)

Total Nonfarm Business (All)

Covers all industries except agriculture, government, and private households

1.0%

GoodsProducing Industries (1133)

Includes mining, construction, and manufacturing

0.4%

Manufacturing (3133)

Factory production of goods

0.5%

Construction (23)

Building, renovation, and maintenance of structures

1.2%

Mining (21)

Extraction of minerals and natural resources

2.3%

ServiceProviding Industries (4892)

Covers a wide range of service businesses

1.4%

Wholesale Trade (42)

Selling goods to businesses in bulk

1.2%

Retail Trade (4445)

Selling goods directly to consumers

0.4%

Transportation and Warehousing (4849)

Moving people and goods

2.1%

Information (51)

Publishing, broadcasting, and telecommunications

2.5%

Financial Activities (52)

Banking, insurance, and real estate

1.2%

Professional and Business Services (5456)

Legal, accounting, consulting, and scientific services

2.0%

Education and Health Services (6162)

Schools, hospitals, and other social services

1.3%

Leisure and Hospitality (7172)

Accommodation, food services, and entertainment

3.9%

Other Services (8189)

Repair shops, personal care services, and religious organizations

0.8%


On the other hand, some forecasts of higher impact for some firms in some industries are not necessarily incompatible with the “all industries” trends for productivity improvements. The best firms in the industries most able to use GenAI might well wring more benefit from the technology. 


In fact, that might tend to be the case for the best and worst firms in almost any industry. 


Also, cumulative productivity gains over a period of years will of course be higher than single year gains. 


Revenue gains in excess of 10 percent for some companies in some industries over a multiyear period are conceivable, even if single-year gains are in single digits or less. 


Industry

Potential Impact

Source, Forecast

Manufacturing

Increased product design efficiency and innovation  Improved production line optimization  Reduced waste and defects

McKinsey & Company: 20% to 40% productivity gains by 2030 PwC: Up to $3.7 trillion global GDP impact in manufacturing by 2030

Retail and  Ecommerce

Personalized marketing and promotions  Enhanced customer experience (chatbots, product recommendations)  Optimized pricing and inventory management

J.P. Morgan: Up to 10% revenue growth for retailers by 2030 Accenture: Up to $1 trillion in annual revenue growth for retailers by 2035

Financial Services

Fraud detection and risk management  Algorithmic trading and portfolio management  Personalized financial advice and wealth management

Goldman Sachs: Up to $1.2 trillion in annual cost savings for financial institutions McKinsey: Up to $200 billion in annual revenue growth for wealth management by 2030

Healthcare

Drug discovery and development  Personalized medicine and treatment plans  Improved medical imaging analysis

PWC: Up to $150 billion in annual savings in the US healthcare system McKinsey: Up to $6 trillion in global healthcare productivity gains by 2030

Media & Entertainment

Content creation (music, scripts, video)  Personalized content recommendations  Streamlined content production workflows

Bain & Company: Up to 10% productivity gains in media content creation by 2030


The point, though, is that big numbers predicted for applied GenAI have to be understood in context. Total-economy gains will be far smaller than many expect, even if some firms, in some industries, will show higher revenue growth; profit rates or productivity gains. 



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