The 2020s could very well be a replay of the late-1990s tech boom that resulted in surging equity prices, rising corporate profits and a robust labor market amid 4% to 5% inflation.
Capital expenditures as a percentage of gross domestic product now stand at 13.9%. Intellectual property resides at 5.8%, equipment 5.5% and structures at 2.7%.
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All of this is encouraging and is spilling over into the real economy well beyond the largest technology companies.
Despite the recent technology selloff in equity markets—the Philadelphia Semiconductor Index declined over 10% this past Friday alone–global demand for these products remains robust and we think that the link among nonresidential investment, corporate profits and economic expansion will remain intact.
Revisions at the Bureau of Labor Statistics now show that hiring has increased at a three-month average pace of 188,000 as unemployment remains at 4.3%.
A legitimate question is how?
Our answer is that a historic capex boom has bolstered productivity and corporate profits and is resulting in an acceleration in total employment.
The two year run rate of AI infrastructure investment looks to be around $1.6 trillion, and if information drawn from first quarter corporate earnings statements proves prescient it will result in an additional $4.5 trillion to $5 trillion.
Perhaps some of those plans may be pulled back amid the tidal wave of IPOs that is about to take place, but the data shows that this cyclical upswing started in the first quarter of 2022 and we expect it to continue.
Put more simply, the AI-induced investment surge is just starting.
It is hard to make the case that the economy or the American labor force will not benefit as productivity-enhancing software, equipment and intellectual property bolster output.
Investment at the macro level
Nonresidential investment in intellectual property finally surpassed investment in nonresidential equipment in 2021 in constant (2017) dollar terms.
Investment in IP has grown at an average yearly rate of 8.4% over the past four quarters.
That’s not to say that investment in equipment is lacking.
Rather, investing in equipment has shown accelerating increases in spending throughout the post-pandemic era and has grown at an average yearly rate of 7.4% over the past four quarters
What is now a six-year surge in equipment investment started as an insurance policy during the labor shortages during the pandemic.
That this spending on equipment spending continues even with a sufficient labor supply suggests an economy continuing to evolve beyond traditional concepts of capital and labor.
Still, it is the investment in intellectual property by corporations that speaks to where the U.S. economy is going.
Despite the cutbacks in government sponsorship of research and development, investment in intellectual property by the private sector is surging for the second time in six years.
It’s those investments that are likely to keep the economy moving forward.
Expectations among manufacturers for capital expenditures decelerated during the 2018-19 trade war as it became clear that the U.S. and Europe had lost out to China’s productive capabilities.
Then after a short recovery, capex intentions fell once more until the middle of last year.
Over the past 12 months, as the AI surge has taken hold, capex expectations among manufacturing firms are accelerating once again.
We see similar patterns in the intentions among manufacturers for investment in equipment and software. Following the severe drop during the pandemic, there was an extended deceleration until the middle of last year, when the AI surge took hold.
The takeaway
Economic development is not a zero-sum game for the labor market or the economy.
There will be radical transformation of some industries and companies and job creation in the most unexpected manner and locations.
Neither the late-1990s surge in investment in equipment and intellectual property resulted in increases in unemployment.
Rather, out of investment in equipment and R&D came new employment opportunities, economic expansion and the structural transformation of the American economic foundation.
Yes, there were excesses during the 1990s tech revolution and there will be investments that do not end up in the most productive or socially useful outcomes.
That is clearly occurring in the tech sector, where private equity and private credit have driven equity valuations and the economy forward in recent years.
But the market provides the means for separating the good from the silly. There are bound to be excesses and mal-investment during the AI period, but it’s hard to imagine one that could bring down the economy.
