The tech sector's role in driving US growth
The tech sector has accounted for the bulk of recent US economic growth, pointing to a speed limit for growth of about 2½%.
Add us as a preferred Google source
The tech sector is driving the US economy, accounting for the bulk of recent growth. Outside of tech, the economy is not as good, while the strength in tech investment is exaggerated by the rapid depreciation of software and computers. Demand for tech is very narrowly based, and the productivity payoff is highly uneven. With the tech sector driving growth, the speed limit for the US economy is about 2½%, higher than the FOMC estimate of potential growth of about 2%. Potential growth is a key influence on the neutral policy rate, so this supports the view that the neutral rate is likely higher than the FOMC estimate of about 3%.
1. The US is the best performing economy in the post-COVID period.
The pandemic has had lasting effects on several advanced economies, with GDP well below pre-COVID levels in the EA, JPN, the UK, and NZ, something you might ordinarily expect in the wake of a financial crisis. In contrast, the US, CAN and AUS have tracked closely to their simple pre-COVID trends, with the US narrowly outperforming.
2. Three-quarters of recent US economic growth has been driven by the tech sector.
The role of tech in driving the US economy can be approximated by estimating the contribution to growth from the tech capital stock and technological progress, where tech covers IT equipment, software and research and development and technological progress is proxied by multifactor productivity.
On this basis, the tech sector has accounted for 75% of recent US economic growth. This is basically the same aggregate contribution that was made during the dot-com bubble of the late 1990s. Overall economic growth was much stronger during the 1990s because the labour market was also booming.
3. Outside the tech sector, the news is not as good.
Outside the tech sector, the economy is not doing that well. Annual growth in the non-tech capital stock is weak at 1% and has recently slowed. Growth at this rate is close to the low points reached after the recessions of the 1980s, 1990s and 2000s.
4. The tech sector’s strength is exaggerated.
While the tech sector is driving US economic growth, the strength of investment is flattered by high rates of depreciation, where rising investment has to account for the rapid wear and tear of existing tech assets. As a result, annual growth in the tech capital stock is also historically weak, although, unlike the non-tech sector, growth has accelerated recently from 6 to 8%.
5. The demand for tech in the US is narrowly based and is dominated by the IT and finance sectors.
The demand for software, which drives tech investment, is narrowly based on the US. Half of all spending on software is accounted for by the IT and finance sectors, with professional services bringing the total share to almost two-thirds.
6. Tech investment has a very uneven payoff on productivity.
Among the three sectors accounting for the bulk of tech investment, the positive payoff in terms of productivity is very clear for the IT and professional services sectors. However, the finance sector – which is dominated by banks and insurers – has seen productivity stagnate since the global financial crisis.
7. The speed limit for US growth looks higher than thought by the Fed.
With the tech sector driving growth, we estimated that the speed limit for the US economy is 2½%, based on a production function approach. This growth rate for potential output is higher than the roughly 2% median of FOMC estimates and has been higher than the Fed’s calculation for about the past ten years.
8. Higher potential growth supports the view that the neutral funds rate is higher than the FOMC estimate of about 3%.
Potential growth is an important influence on the neutral policy rate. With the estimated 2½% speed limit for US growth exceeding the FOMC’s 2% calculation, this points to the neutral funds rate being above the median FOMC estimate of about 3%, where Fed staff models put it at around 3½% and average market pricing is about 4%.
Never miss an update
Enjoy this wire? Hit the ‘like’ button to let us know.
Stay up to date with my current content by
following me below and you’ll be notified every time I post a wire
Based in Sydney, Kieran Davies is Chief Macro Strategist at Coolabah Capital Investments, an asset manager with 65 executives and over $20 billion in fixed-income strategies. Kieran is responsible for macroeconomic research and investment strategy, contributing to the investment decisions of the firm. Kieran has long experience as a macroeconomist in both the private and public sectors. He has worked most recently as Chief Markets Economist for National Australia Bank and was previously Chief Economist, Australia and New Zealand, for Barclays Bank and ABN Amro Bank/RBS. Kieran also worked as Principal Adviser on the macroeconomy and budget policy in the Commonwealth Treasury and Director of Forecasting.
........
Investment Disclaimer
Past performance does not assure future returns. All investments carry risks, including that the value of investments may vary, future returns may differ from past returns, and that your capital is not guaranteed. This information has been prepared by Coolabah Capital Investments Pty Ltd (ACN 153 327 872). It is general information only and is not intended to provide you with financial advice. You should not rely on any information herein in making any investment decisions. To the extent permitted by law, no liability is accepted for any loss or damage as a result of any reliance on this information. The Product Disclosure Statement (PDS) for the funds should be considered before deciding whether to acquire or hold units in it. A PDS for these products can be obtained by visiting www.coolabahcapital.com. Neither Coolabah Capital Investments Pty Ltd, Equity Trustees Ltd (ACN 004 031 298) nor their respective shareholders, directors and associated businesses assume any liability to investors in connection with any investment in the funds, or guarantees the performance of any obligations to investors, the performance of the funds or any particular rate of return. The repayment of capital is not guaranteed. Investments in the funds are not deposits or liabilities of any of the above-mentioned parties, nor of any Authorised Deposit-taking Institution. The funds are subject to investment risks, which could include delays in repayment and/or loss of income and capital invested. Past performance is not an indicator of nor assures any future returns or risks. Coolabah Capital Investments (Retail) Pty Limited (CCIR) (ACN 153 555 867) is an authorised representative (#000414337) of Coolabah Capital Institutional Investments Pty Ltd (CCII) (AFSL 482238). Both CCIR and CCII are wholly owned subsidiaries of Coolabah Capital Investments Pty Ltd. Equity Trustees Ltd (AFSL 240975) is the Responsible Entity for these funds. Equity Trustees Ltd is a subsidiary of EQT Holdings Limited (ACN 607 797 615), a publicly listed company on the Australian Securities Exchange (ASX: EQT).
Forward-Looking Disclaimer
This presentation contains some forward-looking information. These statements are not guarantees of future performance and undue reliance should not be placed on them. Such forward-looking statements necessarily involve known and unknown risks and uncertainties, which may cause actual performance and financial results in future periods to differ materially from any projections of future performance or result expressed or implied by such forward-looking statements. Although forward-looking statements contained in this presentation are based upon what Coolabah Capital Investments Pty Ltd believes are reasonable assumptions, there can be no assurance that forward-looking statements will prove to be accurate, as actual results and future events could differ materially from those anticipated in such statements. Coolabah Capital Investments Pty Ltd undertakes no obligation to update forward-looking statements if circumstances or management’s estimates or opinions should change except as required by applicable securities laws. The reader is cautioned not to place undue reliance on forward-looking statements.
5 topics
Based in Sydney, Kieran Davies is Chief Macro Strategist at Coolabah Capital Investments, an asset manager with 65 executives and over $20 billion in fixed-income strategies. Kieran is responsible for macroeconomic research and investment...
Based in Sydney, Kieran Davies is Chief Macro Strategist at Coolabah Capital Investments, an asset manager with 65 executives and over $20 billion in fixed-income strategies. Kieran is responsible for macroeconomic research and investment...
Comments
Comments
Sign In or Join Free to comment
