Impetus for Higher Economic Growth

In combination, the size of these additional private nonresidential investment flows (FIGURE 1) is such that they could materially alter the course of the US economy. Typically, investment in physical assets tend to have much larger positive multiplier effects on economic growth than the asset-light business models that until now have dominated the market.

It’s too early to tell whether this new industrial revolution will materialize, given the long history of false starts in the US industrial renaissance and the risk that heightened geopolitical turmoil could derail the global economy. Nevertheless, I see several reasons why—for now—data has been surprising on the upside relative to surveys, including:

• The nature of the capex — The amounts announced already exceed the money spent during the last capex pickup, when shale gas production was ramped up. Based on the amounts committed alone, we may see an above-inflation growth rate in private nonresidential structure and equipment spending for several years to come. Importantly, some of the mega-caps are able to finance their capex without external funding, thus sidestepping public credit markets as these have become less willing to fund capital-intensive infrastructure projects with long payback periods.

• Productivity gains resulting from AI capex — AI is already delivering productivity gains, with companies reporting return on their investment (ROI) at a much faster rate than was the case for previous technology breakthroughs. This acceleration in ROI, in turn, further reduces the need for external funding.

• The urgency and scale of the investments needed — After a prolonged period of underinvestment, there's an urgent need for physical investments to upgrade aging US infrastructure.

• The resilience of the US consumer — A weakening US consumer would undo much of the additional growth momentum generated by this incipient industrial revolution given how crucial consumer spending is to the overall economy; therefore, I'm monitoring this risk closely. However, despite some signs of increased vulnerability, consumers—even at the lower-income spectrum—appear to be more resilient than markets assume. Consumer balance sheets remain robust, though excess savings are now largely spent, and while AI may eventually lead to job losses, workers’ bargaining power has increased for now. Many consumers also still benefit from the wealth effect of increased house prices, while real incomes are continuing to rise thanks to the drop in inflation.

On balance, therefore, I think the US economy may be structurally positioned to deliver higher-than-anticipated growth, and that even if a recession were to materialize, it would likely be shallow.