Smells like animal spirits

The 2020s could very well be a replay of the late-1990s tech boom that resulted in an acceleration in rising equity prices, corporate profits and total employment amid 4% to 5% inflation.

Capital expenditures as a percentage of gross domestic product now stand at 13.9%. Intellectual property accounts for 5.8%, equipment 5.5% and structures 2.7%.

All of this is encouraging and is spilling over into the real economy well beyond the largest technology companies.

Despite the recent technology sell-off in equity markets, global demand for these products remains robust, and we think that the link between nonresidential investment, corporate profits and economic expansion will remain intact.

To wit, revisions at the Bureau of Labor Statistics now show that payroll has increased at a three-month average pace of 188,000, while unemployment remains at 4.3%.

That raises a legitimate question: How?

Our answer is that a historic capex boom has bolstered productivity and corporate profits, accelerating employment growth. 

The two-year run rate of artificial intelligence infrastructure investment looks to be around $1.6 trillion—and if signals from first-quarter corporate earnings statements prove prescient, it will drive an additional $4.5 trillion to $5 trillion in development.

Some of those plans may be pulled back amid the tidal wave of initial public offerings and volatility in capital markets; but the data indicates that this cyclical upswing started in the first quarter of 2022, and we expect it to continue.

Put simply, the AI-induced investment surge is just starting. And the economy and its labor force stand to 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 equipment in 2021 in constant (2017) dollar terms, and has grown at an average yearly rate of 8.4% over the past four quarters.

That’s not to say investment in equipment is lacking. What began as an insurance policy against pandemic-era labor shortages has become a six-year surge, accelerating at an average yearly rate of 7.4% over the past four quarters.

The fact that equipment spending continues even with a sufficient labor supply suggests an economy evolving beyond traditional concepts of capital and labor. 

Still, it is corporate investment in intellectual property that speaks to where the U.S. economy is going.

Despite the cutbacks in government sponsorship of research and development, intellectual property investment by the private sector is surging for the second time in six years.

It’s that investment that is likely to keep the economy moving forward.

Investment intentions at the local level

Surveys by the regional Federal Reserve banks indicate that capex and investment in equipment and software are on the upswing.

Manufacturers’ expectations for capex 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 again, until the middle of last year.

Over the past 12 months, as the AI surge has taken hold, capex expectations among manufacturing firms have accelerated again.

We see similar patterns in manufacturers’ investment in equipment and software: a severe drop during the pandemic, followed by an extended deceleration that lasted until the middle of last year, when AI-driven momentum reversed the trend.