How to invest as American productivity surges

The pandemic required companies of all shapes and sizes to digitize their business models for “contactless” customer experiences. Capex grew at an annual rate of over 15% in 2021, the fastest pace in about 40 years. While much of this spending began out of necessity early in the pandemic, more of it has shifted toward growth-supporting investments, as businesses continue to re-engineer their models for delivering products and services digitally.

In the post-COVID-19 economy, fewer workers and upward pressure on wages have prompted employers to automate more jobs, helping bring down business costs and enabling some employees to shift skills to more productive roles.

The pandemic revealed vulnerabilities in globally integrated supply chains, leading companies to invest more in domestic production. This is being energized by the passage of spending bills like the: 

• $1 trillion Bipartisan Infrastructure Bill;
• $50 billion CHIPS Act for US semiconductor investment; and
• 2022 Inflation Reduction Act, which included $369 billion in energy infrastructure spending. 

New investments in traditional energy infrastructure—meant in large part to bolster Europe’s energy independence amid the war in Ukraine—are likely to eventually give way to accelerating decarbonization investments. That could bring increased capital spending on initiatives such as upgrading energy infrastructure and electrifying the US auto fleet.

Rivalries are intensifying between nuclear superpowers, spurring public and private investments in areas such as defense, cybersecurity, and public health. In fact, US Department of Defense spending, as a share of annual Gross Domestic Product (GDP), is forecast to rise from 4.7% today to the roughly 6% level maintained in the early 2000s following the 9/11 attacks.

US households, businesses, and banks are enjoying their strongest financing position in decades. Balance sheets across the board remain excellent, having improved through more than a decade of reduced borrowing, stronger regulation, and low interest rates.

The US workforce is transitioning from aging Baby Boomers to younger, tech-savvy generations. Growth of the prime working-age population (25-54) is poised to re-accelerate while the median working age is projected to decline over roughly the next decade. Shalett believes this generational turnover will help accelerate innovation and automation trends, resulting in healthier profits that can support increased capital investment.

Innovation in the new economic cycle, is likely to feature technologies that are scalable, in areas more likely to boost business productivity and profits, such as data analytics and artificial intelligence, thus generating capital for reinvestment.

As the Federal Reserve normalizes policy to tame inflation, the era of negative real interest rates has come to an end. Higher rates could lead to a more efficient allocation of capital across the economy, which may starve unsustainable businesses of capital and steer resources toward growing businesses with the greatest potential to enhance productivity, and therefore, generate wealth.