The Economic Trends Every Business Should Watch

In this episode, we break down economic trends shaping businesses with economist Lauren Saidel-Baker. From inflation and labor shortages to AI and productivity, she shares what companies should really be watching over the next few years and why growth alone doesn’t guarantee success.

Sean Riley: Hi, and welcome to unPACKed with PMMI. I'm your host, Sean Riley. In this episode, we break down economic trends shaping businesses with PMMI’s Executive Leadership Conference presenter and Economist Lauren-Saidel Baker. From inflation and labor shortages to AI and productivity, she shares what companies should really be watching over the next few years and why growth alone doesn’t guarantee success. Let's have a listen.

So with all the fancy introductions out of the way, welcome to the podcast, Lauren.

Lauren Saidel-Baker: Thank you so much. So great to be here.

Sean Riley: Oh, the pleasure is all ours.

So there were two ways that I wanted to start this, but I’m definitely leaning toward this way just because you used the phrase “profitless prosperity,” and it really stuck with me. It stuck with me when I saw your presentation at the ELC. So I want to clear that up for my listeners, to get that explanation out there, because I think that’s a really clear way that you explained that. So could you explain to my listeners: what does that actually look like for packaging and processing OEMs in the day-to-day world, this “profitless prosperity”?

Lauren Saidel-Baker: Sure. And I’m so glad you started here because I think that is the most important concept, really, that businesses are going to struggle with over the next, I’ll say, three to five years.

Profitless prosperity—it’s essentially the view that you can grow your top line. I think that’s going to be not easy in the coming environment, but relatively easier. Clearly, we’re not in those boom times post-COVID anymore, but there is so much inflation out there that if you’re only focused on top-line sales, top-line revenue, I think you’re going to miss, really, the bigger picture here. If you’re not laser-focused on how your costs relate to the costs that you’re passing through, that is a really clear recipe for margin erosion.

So I think businesses, if they’re not watching margins, if they’re not watching actual end profitability, if you’re just trying to hit some sales growth number or hit some dollar value, that can get very murky. And certain business lines might not be profitable anymore. They might not be worth going after that business. And that’s a tough choice when you might be more capacity-constrained or just have labor issues where you can’t find enough people to be working the critical skilled roles, so different choices are going to have to be made.

And it’s important to know your own competitive advantages because pushing through those price increases—I know that’s not fun. No one wants to have those conversations with customers—but they’re really going to be more and more critical going forward.

Sean Riley: With the way costs are rising and inflation is staying with us, how do OEMs handle pricing without scaring the customers away?

Lauren Saidel-Baker: That’s the big question. Do you put through one price increase and be done with it, or do you do maybe multiple tiered price increases? I think surcharges are a bad idea right now. I know that’s the knee-jerk reaction—to say, “The Strait of Hormuz is closed and oil prices are high, so let’s just put a surcharge on.” But to me, “surcharge” sounds temporary. It sounds like that will come off again with this will-they-won’t-they-open-the-strait, will-they-won’t-they-ceasefire kind of environment.

But prices overall, inflation overall—it’s not just oil prices. That’s actually one of the more mild inflation drivers that we see. They’re much more pervasive, a little bit more, maybe, insidious, and that’s going to be the real challenge. It’s the things that we’re not focused on in the headlines that are driving up your costs.

Sean Riley: Okay. You touched on it a bit—you talked about labor. Anyone that listens to this podcast, we talk about labor every time we have a podcast. It’s a real constraint. I guess, where on your end are you seeing that OEMs feel that the most? And I don’t know if you can suggest this as an economist, but what realistically can be done about it right now?

Lauren Saidel-Baker: I’m glad you said “realistically.” Actually, the easiest solution right now is to get into our time machine and go have more babies 20 years ago.

If we can’t do that, and we can’t increase the natural labor supply here, Gen Z is now the generation aging into the workforce. I also don’t think immigration is an easy one right now, not under the current—

Sean Riley: True.

Lauren Saidel-Baker: —kind of policies and administration priorities. So what we have to do is just get better at attracting people. Maybe that’s finding them earlier. I work with a number of companies who go right into high schools and say, “We have an internship program, a training program. When you come out, you will do exactly the job that we need done—conveniently for us—but you’ll have a guaranteed job, conveniently for you.”

The traditional four-year college university—that isn’t necessary anymore, but I think the social momentum is slow to shift to that realization. Trade schools are really making a comeback. So I think, again, we’re on that swing of the pendulum. It just could be going a little bit more quickly for some of these very skilled jobs.

At the end of the day, though, it goes back to the first thing we were talking about. You can just pay more to attract people to your company and not the other guy. That’s going to be a higher wage inflation cost driver that you need to be aware of, that you absolutely need to be budgeting for.

So we are still seeing—even though wage inflation is not quite so high as it was a couple years ago—it’s still relatively elevated. Most sectors are around that 4% range. That’s higher than a lot of businesses and consumers are used to. You think of this partly as just a cost-of-living adjustment before you even think about the salary increase, the merit increases.

Sean Riley: Okay. Yeah, it’s unfortunate that there isn’t, like you said, a magic bullet for this solution because it seems to go through every podcast that I have, no matter what topic we’re talking about.

Lauren Saidel-Baker: It really does.

Sean Riley: It just is what it is.

Lauren Saidel-Baker: It is, but I think there are some things you can do. If you can increase your own productivity, that is really going to pay dividends. I met one CEO, and he said, “Every time one of my employees comes up to me and asks for a raise, I say, ‘Yes, absolutely. One hundred percent.’”

Sean Riley: I’ll work there.

Lauren Saidel-Baker: “But you need to tell me how I’m making more money to afford to pay you that raise.” That was his boilerplate answer. And if they could come up with a good solution, then yes, he wanted to pay more. It wasn’t that he was trying to keep wages down. But with profitless prosperity, with these increased cost pressures, you do have to know: how do we do more with less? How do we get better productivity?

Maybe it’s AI. I don’t personally think AI is quite there yet, at least in this way with the OEMs, but if you can be that—

Sean Riley: Interesting.

Lauren Saidel-Baker: —creative solution and find those ways to get ahead of the game, I think those companies will really be the winners here.

Sean Riley: I can’t let you say “AI” without touching on it. That’s interesting. So is it that you’re not bullish on it for a manufacturing-type thing, or is it in general?

Lauren Saidel-Baker: Yeah. I sound like such an old—I call myself a geriatric millennial when I know I sound like a curmudgeon saying AI is not all it’s cracked up to be.

Really, as I’m looking at AI, we are evaluating essentially just that: the productivity gains that AI can give us. And there’s some evidence that the slope has turned upward so that, economy-wide, everyone’s getting just a little bit more productive than normal.

However, if you take this back to—I like the ’90s as a good example—when computers were coming on the scene, the internet was coming out—

Sean Riley: The internet. I’ve heard that as a reference point before, so that’s interesting you said that.

Lauren Saidel-Baker: It’s a great proxy. And we are not surpassing that growth rate. So it isn’t that AI, ChatGPT, generative AI, all of these things—it’s not just a right angle up that makes everything happen easier and more quickly. It’s really iterative. And we still see relatively low adoption, especially in something like the manufacturing sector. It’s just taking more time.

The bigger companies are exceeding smaller companies just in having resources to develop and devote to things like AI.

So I said industry-wide—excuse me—economy-wide, all sectors together, productivity is increasing at maybe a slightly higher clip than the past few years. But in manufacturing specifically, productivity is actually going backward. We’re actually getting less productive per labor hour.

Sean Riley: Really?

Lauren Saidel-Baker: And so that’s why I think there has to be something here. I really do think a company that hits on the right solution can use this and do better. Again, we saw that in the ’90s—huge gains in manufacturing with that earlier round of tech development. We haven’t yet seen that hit with this round of AI.

Sean Riley: Interesting. I just heard a younger generation all have a sigh of relief. They’re not going to lose jobs because of AI, because that seems to be the fear you hear out there.

Lauren Saidel-Baker: Oh no, they’ll have jobs.

Sean Riley: Okay. Let’s go a little bit on the positive side, as we’re trying to keep people listening. For companies that are serving a mix of markets, where do you see the best opportunities? Where is there room for growth? Where is there room for people to take advantage of it in these uncertain times?

Lauren Saidel-Baker: Absolutely. Tech—anything high-tech, computers, electronics—that really has been leading the way. Power generation is another one where we see a lot of opportunity just because we need so much more power to supply all that tech.

But within, I would say, a more core footprint here, I really like the pharmaceutical space. We’ve seen incredible gains there. In fact, pharmaceutical is technically classified in the bigger bucket of chemical production here in the United States. And if you take pharmaceutical out of the chemical bucket, chemicals have been basically flat. Really, all of the growth has been coming from pharma.

Sean Riley: Really?

Lauren Saidel-Baker: I don’t expect that to slow down anytime soon. As we have aging populations, there are just more and more resources being developed or dedicated to the medical segment.

Food is always a good one. It’s relatively inelastic demand. So maybe that food—do you go to the restaurant versus the grocery store when you feel your budget being pinched? There will be some allocation like that. But even for something longer term, if we see major economic pain, some of those sectors will be very resilient. So if you need a core area to be in, I don’t think that’s a very bad one.

Sean Riley: Okay. I like that. That’s good.

Okay, then I guess to put a little bit of a button on our discussion: you’re talking to an OEM executive and they’re trying to plan their next—you want to say three to five years, I think, is the little window you used. Is that—

Lauren Saidel-Baker: Sure.

Sean Riley: What are the biggest signals you’d tell them to look out for? What are the trends to look out for that indicate things are going to get better or worse? What should they be keeping abreast of?

Lauren Saidel-Baker: The first thing they need to do is track their own rates of change so that they know how they specifically relate to the broader sector and the broader economy.

But if you just want a couple of key indicators to watch, I’m really hanging my hat on the U.S. consumer. I know we hear those dour headlines—that everyone feels the pinch of inflation, everyone sees how high gas prices are at the pump—but it never pays off to count the U.S. consumer out.

So the critical metric that I want to watch for them is real personal income, so that is income adjusted for inflation. If we start to see inflation taking a bigger bite out of our paychecks such that our wage gains are actually being more than eaten up by higher inflation, that would be a bad thing.

We’re not there yet. We’ve seen some leveling off in just how quickly our inflation-adjusted wages are growing, but today that growth is still positive.

Sean Riley: Okay, good.

Lauren Saidel-Baker: Consumer spending makes up about two-thirds of GDP. So if you only follow one thing, I think the consumer should be that one thing. Now, I hope you follow more. There is a lot more out there to follow. But for just one benchmark, I think that’s a pretty good one right now.

Sean Riley: And if you had to predict, just for fun, do you have an idea of where we might see an upslope coming?

Lauren Saidel-Baker: So I think ’26 is going to be a relatively healthy year. Not runaway growth, nothing to write home about, but solid and steady. I think ’27—

Sean Riley: Sustained.

Lauren Saidel-Baker: —might feel a little bit softer relatively. Some sectors are likely to contract very mildly, just barely negative, others just trending flatter. ’28 should be the next real upswing. So if you’re preparing—

Sean Riley: Okay, good.

Lauren Saidel-Baker: —for new growth, that’s generally the timeline I would give someone in this sector. Obviously, different sectors lead and lag. So residential construction tends to move a year ahead of the cycle, non-res moves a year behind. But for most of the economy, most of the sectors we’re talking about today, that is the general ebb and flow that I would give you.

Sean Riley: I love it. Okay. Thank you so much, Lauren, for your candor, for coming on here, and for putting the economy in understandable terms for me and our listeners. So we really appreciate you taking time out of your day to do this.

Lauren Saidel-Baker: I’m so glad I could do it. Thanks so much for having me.