22 August 2024

The Eagle Eye

What's setting today's executive agenda

Does market volatility risk a US hard landing?

Recent volatility in global financial markets has left analysts and investors speculating whether it is being driven by technical factors or more fundamental shifts indicating a looming US recession.

Inflation, rising US unemployment and heightened geopolitical tensions are considered major catalysts for the volatility. The unease in markets was exacerbated by the unwind of the yen carry trade and swirling questions about the Magnificent 7 tech companies’ pace of AI adoption.

In this episode of The Flip Side, Global Head of Research Jeff Meli and Global Chairman of Research Ajay Rajadhyaksha discuss recent financial market dynamics and debate the re-emergence of a hard landing for the US economy.

The immigration tailwind

Almost half a million people immigrated into the US in December, a record that was just the latest in a series of elevated inflows stretching back to spring 2022. While the surge has caused a public backlash and prompted political measures to curtail it, immigration has helped boost economic growth. It has helped relieve post-pandemic labor shortages and has been one of the factors behind the strength of the US economy.

• Immigration has helped ease tight labor conditions. Net immigration has increased the US population by more than 7 million in the past two years, boosting the labor force by almost 5 million, according to the Barclays Immigration Tracker (Figure 1). That has helped diminish the imbalance between labor supply and demand that prevailed following the pandemic. It has also provided direct reinforcement for aggregate demand.
• Immigrants likely contributed nearly a third of economic growth. We estimate that new immigrants accounted for three quarters of the increase in private payroll employment over the past year. Their contribution of additional hours worked to output growth more than offset a drag from US-born workers.
• Policies to stem the flow would squeeze the labor supply. We estimate that sustaining the Biden administration’s recent executive action that limits inflows of asylum seekers would trim payroll gains by almost 1 million in 2025 and lower GDP growth by half a percentage point, according to our estimates. A return to former President Trump’s 2017-18 immigration policies could subtract twice as much from potential growth in payrolls and economic output.

Figure 1. The recent surge in immigration has boosted the labor supply

Source: Department of Homeland Security, Department of State, US Customs & Border Protection, Social Security Administration, Congressional Budget Office, TRAC Immigration, Barclays Research

A surge in asylum seekers

Immigration to the US takes place in many different forms. A decade ago, the biggest source of immigrants was green cards granted abroad. Today, humanitarian immigrants – asylum seekers and those invited under various government programs to escape wars or natural disasters in their countries – make up the majority (Figure 2). Asylum seekers typically qualify for a work permit after a six-month wait. Unlawful entries make up only 15% of today’s inflows, though this share has also grown in the past decade, according to the Barclays Immigration Tracker. While several million more enter under temporary work visas every year, most stay only for the period allowed by their visas. Thus, their contribution to net immigration is much smaller.

Computing net immigration flows is extremely challenging because there is no centralized data source. We scoured 14 different sources to build the Barclays Immigration Tracker, also adjusting for emigration flows out of the country. According to our tracker, net immigration remained relatively stable between 2014 and 2019, before plunging to negative territory due to pandemic-era travel restrictions. Since these were lifted in 2021, immigration has risen steadily, reaching an all-time high of 4 million in 2023.

Figure 2. Humanitarian immigrants’ share in the total has jumped in the past decade

Source: Department of Homeland Security, Department of State, US Customs & Border Protection, Social Security Administration, Congressional Budget Office, TRAC Immigration, Barclays Research

Immigration’s boost to the economy

This recent surge has helped ease the tight labor market that prevailed following the pandemic. In its absence, we think that labor shortages would have been a meaningful economic headwind, exacerbating wage and price pressures and requiring a more restrictive monetary policy stance. Since 2022, when vacancies reached record levels, jobs have increasingly been filled by immigrants. By our estimates, such jobs have accounted for about 75% of the increase in private payroll employment in the past 12 months.

As immigrants make up a growing share of employment gains, they also contribute to a growing share of output growth. In the first quarter of 2024, much of the 3.1% year-on-year growth in output could be attributed to productivity growth, while 0.9 percentage points was due to hours worked by immigrants, offsetting the 0.6 percentage-point drag from hours worked by native born workers.

Policies to curtail immigration

Both Democrats and Republicans are campaigning on policies to slow inflows. We looked at three scenarios to see the effect of these on employment and the economy. In the business-as-usual scenario, where President Joe Biden’s recent executive order that attempts to limit substantially the flow of asylum seekers at the southern border, where the majority enter, has no meaningful influence due to judicial intervention or is circumvented through other means, non-farm private payroll gains settle at about 208,000 a month in 2025, close to current levels. In the scenario where the executive action actually curbs immigration as intended, we estimate it would subtract 65,000 from the monthly job gains in our business-as-usual scenario. A return to 2017-18 immigration policies enacted during the Trump administration would slow monthly payroll growth by 125,000. That would leave job growth well below pre-pandemic levels, as the payroll gains of US-born workers have fallen sharply in the past decade.

The US economy’s growth trajectory would differ under these scenarios as well. The business-as-usual case points to potential real GDP growth of 2.6% in 2025. The intended curbs by the June executive order and continuation of the same policies in the next administration could deduct 0.5 percentage points from that potential GDP growth. The more restrictive immigration scenario would slow economic growth by almost one full percentage point.

Water tech to the rescue

The world is facing a water crisis. By 2050, half the urban populations around the world could face water scarcity. Meanwhile, efforts to solve the crisis are making little headway. Technology can provide solutions, from improving efficiency of use to harnessing new sources, but investment is needed to scale the technologies available or being developed.

The Eagle Eye talked to Hannah Greenberg, an analyst on the Thematic Investing Research team, about the water crisis and the role of water tech in helping solve it.

The Eagle Eye: Why is there a water crisis?

Hannah Greenberg: Water has largely been overlooked compared with other environmental issues, such as carbon emissions or climate change; there have thus been fewer water-specific policies, and you cannot solve water issues with those alone. Another challenge is the low cost of water. We see water as essentially free. During times of scarcity, energy prices spike, but water prices have not despite the crisis. If water prices spiked like oil prices when supply is tight, there would be more awareness of its scarcity and a bigger effort to find solutions. Even though we derive trillions of dollars in economic value from water, we undervalue its contribution to economic output and have not been doing enough to address the increasing scarcity and quality issues around the world. Social and environmental effects have been better understood, but the economic side of the crisis has not been. Companies worldwide face rising financial risks related to water.

Eagle Eye: What kind of risks?

Greenberg: They face serious operational risks. Many sectors rely on water for their industrial processes. If companies do not have water to run their operations, that will have serious consequences for their production. For example, last month during a severe drought in Mexico, many chemical companies had to halt production.

Eagle Eye: How can technology help?

Greenberg: There won’t be one silver bullet technology that solves the water crisis. Instead, we will need a range of solutions to address its different elements. Encouragingly, we are seeing advancements in both mature technologies and new innovations. We highlight five key areas: digital water, precision irrigation, advanced water treatment & recycling, desalination and atmospheric water generation (Figure 1). The scaling of these technologies will be dependent on location and application, given cost is a key barrier to adoption. Different technologies will make the most sense in different regions. When you are located near a body of salt water and have cheap energy sources, desalination makes sense. But if you are deep inland and energy is expensive, you have to look at other water tech solutions.

Figure 1. Five major areas where water tech can help

Source: Barclays Research

Eagle Eye: What is digital water? It is not made up of 0s and 1s, is it?

Greenberg: No, it is not. Digital water is using technologies such as sensors and artificial intelligence to make data-driven decisions about water management. Applications include smart metering and smart infrastructure, where digital solutions can catch water leaks and suggest maintenance in advance so leaks do not happen in the first place. Many companies have sustainability targets including water consumption and discharge targets. Ecolab is partnering with a lot of them, providing digital water solutions to help companies reach their sustainable water targets.

Eagle Eye: What is atmospheric water generation? Can we make water from air?

Greenberg: Yes, we can. And the technology is not that new. Refrigeration-based processes – causing water vapor to condense and turn to liquid – has been around for a while. Now, we are seeing more innovation in novel processes and sorption, which uses a solid or liquid dehydrating agent to attract moisture from the air. Montana Technologies is commercializing metal-organic framework technology, using porous polymers to capture water from the air. Drupps has a system that traps the water from steam coming out of factory chimneys while recycling the heat in the steam into the process. Cost is an issue in atmospheric water generation; it is more expensive than other such technologies. But if you are not in a location where you can use another technology such as desalination, atmospheric water generation can be still cheaper than trucking in water from a distant source.

Eagle Eye: Desalination is not new. It has been used by the Gulf states and Israel for a long time. Is anything new there?

Greenberg: There are new developments on the technology side driving costs down. There have been advancements in membranes – what separates the water from the salt and the minerals – making them more efficient. It is an energy-intensive process, so there are efforts to use renewable energy more. Oneka Technologies offers wave-powered desalination: if you are using the ocean as the source of your water, why not use its energy to power the process as well?

Eagle Eye: All this technology will help us use water more efficiently and access more clean water. But is it possible to do some things without water altogether?

Greenberg: Yes, indeed. Waterless technologies – replacing water in industrial processes – could also help us to reduce our consumption. Waterless data centers, waterless cathode manufacturing, waterless dyeing of textiles: all that is possible and happening, if slowly. The textile industry is one of the worst polluters of water and uses a lot of water to dye fabric, up to 150 liters per kilogram of fabric. DyeCoo has developed a water-free process, using pressurized carbon-dioxide instead.

Booking experiences online

Almost everyone buys their plane ticket and reserves their hotel room in advance when traveling. What they do once at their destination – the city tour, the museum visit and the ATV ride in the desert – are usually done on site and in person. But like many other things that have shifted more online since the pandemic, booking experiences on web sites is now among the fastest growing segments of the online travel industry.

• Spending on experiences is likely to grow. Travelers already spend quite a lot on tours, attractions and activities at their destinations. It was roughly $235 billion last year, making up more than 10% of total travel spending. We expect experience spending to grow faster than other segments, reaching $300 billion in 2026.
• More people are booking them online. The pandemic pushed people to purchase more goods and services online, boosting e-commerce. Travel experience bookings have benefited from the same trend, helped by younger generations preferring to do everything on their smart phones. The share of experiences booked online has risen from 17% pre-pandemic to over 30% this year, a trend that is likely to rise in the coming years (Figure 1).
• Online travel agencies are also in the game. Specialized platforms such as Viator and GetYourGuide make up the bulk of current bookings. But the leading online agencies are also offering experience booking and slowly gaining market share from the specialized shops. Airbnb has more than 40,000 local experiences on offer in over 1,000 cities.

Figure 1. Booking experiences online is likely to double this year from pre-pandemic levels

Source: Arival, Phocuswright, Barclays Research

What to do, what to see

Typically, many travelers prefer not to have a rigid schedule while on vacation, opting to book experiences when they walk up to the attraction, paying in person. While this has historically been a hurdle against online booking adoption, several current trends make us optimistic about the growth of online experience bookings. One is the evolving consumer preference toward more experience-driven trips and greater awareness of offerings at a destination. And even if they do not buy their museum tickets a month in advance, as they typically would with their plane ticket, consumers are booking experiences online at the last minute to skip the line at the attraction or a day in advance to make sure they can get in. This shift is helped by wider smart phone adoption, and the utilization of phones as a means to search for what to do at one’s vacation destination.

Meanwhile, more operators of tourist experiences are embracing online booking platforms to help manage peak/trough demand better. For small operators, being on the online booking site adds visibility and provides incremental business. As more supply comes online, making it easier to find and book experiences, it will likely increase frequency and adoption.

The experience specialists

The online experience booking is a highly fragmented market. The biggest company, Viator, has about a 5% market share, followed closely by GetYourGuide. Viator, which was acquired by Tripadvisor in 2014, has an inventory of more than 350,000 experiences from 55,000 operators globally, though it is more focused on North America. GetYourGuide is stronger in European experiences, while Hong Kong-based Klook prioritizes Asia even though it offers experiences globally.

The large online travel agencies have also been involved, although the experience portion has not yet become a significant contributor to their bookings or revenues. Booking.com, Expedia and Airbnb do not disclose how much the experience business generates for them. Our estimate is that the share of online travel agencies in total experience booking spend was about 6% last year, but we expect it to almost double in the next three years as they take advantage of cross-selling experiences to their customers already booking their flights or stays at their sites (Figure 2).

Figure 2. As booking experiences shift online, travel agencies are gaining share

Source: Phocuswire, Skift, Barclays Research