For almost a decade, a central theme in our research has been about the unfolding productivity and capital expenditure (capex) revival. While progress around this narrative has been slow, evidence suggests momentum has started to pick up as a result of a surge in structures investment, which should soon start to see follow through investment into equipment, as well as other several economic dynamics, like innovation, demographics, geopolitics, and government support. The unfolding capital investment boom is being built on four key developments.
The first development relates to an emerging structurally tight labor market and the probable rise in the relative cost of labor to the cost of capital, like plants, equipment, and machinery. With respect to labor supply, population growth is negative across Europe, China, and Japan, and it remains just above zero in the U.S. and Latin America, with populations aging rapidly in many of these areas. The second leg of the capex revival relates to U.S. capital stock being old and in need of an update. Many companies uncovered this uncomfortable truth during COVID-19 when workers were scarce. A third development deals with the fact we’re in the midst of another powerful innovation wave. Due, in part, to a dramatic boost from generative AI, technological innovation has continued to aid with productivity growth. The final development relates to fiscal incentives, as government-provided tax inducements to invest domestically (Infrastructure Investment and Jobs Act, the CHIPS and Science Act, and the Inflation Reduction Act) are proving to be attractive to many.
Employment of the incentives provided in these recent acts has been substantial, with demand for CHIPS-related subsidies reported to already be close to double the allotted amount of $53 million. Additionally, the U.S. has seen a rise in investment in structures, specifically related to manufacturing and, more specifically to technological, electronic, and electrical areas.
While there’s a compelling case being made for greater investment in energy supply to support the data industry, there’s also a significant—but less talked about—potential for a rise in demand for equipment. The more plants, factories, and facilities being built, the more equipment is needed to fill them. Many companies have been wrestling with the headwinds of excess inventories following the COVID-19-related supply-chain disruptions, volatile pricing, geopolitical uncertainty (including the upcoming U.S. elections), and the impact of higher interest rates. Still, manufacturing was one of the first sectors impacted by this economic slowdown, and there’s growing evidence that it is at least starting to stabilize and tentatively reaccelerating.
The current economic cycle has been unusual, but there is reason to believe manufacturing activity has found a base and should start to improve as rates fall, inventories are rebuilt, equipment spending increases, and other secular growth forces help to support future expansions.
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