The Postpandemic Normal Is Here and It Isn’t That Special

That shift is now largely complete. While the pandemic is still with us, Americans are learning to live with it. Wall Street, as is its wont, was too optimistic about how long and how far this transformation would go.

Almost overnight, millions of Americans shifted from buying in person to online, propelling Amazon. com Inc. to annual sales increases of 20% to 40% through 2020 and 2021, unheard of for a company whose annual revenue already approached $300 billion. In the first quarter of this year, though, growth slowed to 7% and could slip to as little as half that in the current quarter, the company said. Its shares are down a third from last year’s peak.

Executives at Shopify Inc., whose systems run independent merchants’ online stores, early on described the pandemic as a time machine that compressed a decade’s evolution of spending habits into a matter of months. E-commerce leapt from 16% of retail sales (excluding autos) in February 2020 to 22% that April, according to the Commerce Department.

The time machine’s work is now done. E-commerce has since stabilized at around 19% of retail sales. In February, Shopify’s chief financial officer warned investors that “the Covid-triggered acceleration of e-commerce…will be absent from 2022.” Its stock has lost three-quarters of its peak value.

Netflix Inc., which boomed during the pandemic-driven shift from theatrical to in-home entertainment, recently announced a surprise decline in subscribers. Its shares are down 71% from last year’s high. Peloton Interactive Inc., whose web-connected machines surged in popularity when gyms were closed, is down more than 80%, while PayPal Holdings Inc., whose products powered much of the switch to digital payments, is off 71%.

Food delivery startup DoorDash Inc., online used-car retailer Carvana Co., Zoom Video Communications Inc. —synonymous with remote working—and telehealth provider Teladoc Health Inc. have all shed the bulk of their pandemic gains. The collective market value of these companies has declined 46% since last July, or about $1.3 trillion. By comparison, the entire S&P 500-stock index is off just 6%, or $2.1 trillion, in the same period.

There are parallels with the dot-com bubble that burst in 2000. In both episodes, technology did fundamentally alter our way of life, but the market, aided by the Federal Reserve’s easy money, drove stock prices to levels that assumed these trends would continue indefinitely. They didn’t.

For instance, 35% of employees teleworked at some point in May 2020 because of the pandemic, during the first lockdowns, according to the U.S. Labor Department. The share has been trending lower ever since, reaching 10% in March. This points to a postpandemic normal where people shop, work and live remotely more than before the pandemic, but such activity doesn’t grow especially quickly.

The companies that rode the pandemic digitization wave are generally profitable enterprises with viable business models. Though fervent believers in a secular shift to digital life and work, their leaders knew Covid-19 was pulling forward future growth, and that the boost would eventually dissipate. Yet they kept hiring and investing.

Streaming, for example, remains a growth industry; but whereas subscriptions grew by around 8% per quarter for the past two years, they grew only 4% in the last quarter, according to MoffettNathanson, an investment research firm. Adding customers has gotten harder while the need to invest in new content is relentless.

“Covid created a lot of noise on how to read the situation,” Netflix co-Chief Executive Reed Hastings told investors last month. The company said it thought growth had slowed in 2021 as the Covid-19 effect waned, but now blames other factors, including increased competition from other streaming-content providers.

Amazon was on a hiring and building spree throughout the pandemic to keep up with demand, then found in the first quarter it had overhired and overinvested. “We currently have excess capacity in our fulfillment and transportation network,” Chief Financial Officer Brian Olsavsky said last month. “We hired more people and then found ourselves overstaffed when the Omicron variant subsided rather quickly.”

This points to lower investment and hiring in these sectors in the months ahead. That need not sink the economy; consumer spending can rotate back to in-person shopping, working and dining. Nonetheless the deflation of the pandemic bubble adds to recessionary headwinds from other forces such as rising interest rates and costlier energy.

The bigger problem is that digitization was supposed to boost productivity and efficiency throughout the economy, justifying higher wages, higher profits, and less inflation. However, when the pool of potential new customers shrinks but the labor and facilities needed to serve them keeps growing, those efficiencies fade. In the first quarter, productivity fell 1.4%, according to IHS Markit, leaving it no higher than the third quarter of 2020. Work really has changed in the past two years; it is just not a lot more productive.

Write to Greg Ip at [email protected]