Morgan Stanley
  • Wealth Management Insights Audiocasts
  • Jan 4, 2023

The Next American Productivity Renaissance

Speaker: Lisa Shalett
The Next American Productivity Renaissance


Lisa Shalett: Hello and welcome to another edition of Wealth Management Insights. I am Lisa Shalett, Chief Investment Officer for Wealth Management. And today is Wednesday, January 4th, and I’m recording this from my office in Manhattan, New York.

As we start the new year, I’d like to introduce a foundational framework that’s going to inform our investment thinking for the coming years. We believe that we’re experiencing a unique combination of supply and demand dynamics in our economy, thanks to COVID, which delivered a once-in-a-generation shock to the system. These factors, we believe, are igniting a powerful and transformative multi-year capital investment cycle in America, which could usher in an era of higher growth, higher productivity and more widespread prosperity. We’re calling it “The Next American Productivity Renaissance.”

Let’s put this into context.

Think back to the Great Financial Crisis of 2007 and 2008. This period set off a business cycle that came to be characterized by low economic growth, low inflation, low capital deepening, narrow innovation and low productivity. This period of economic stagnation, stretching more than a decade, bestowed market leadership to a narrow cadre of mega-cap consumer technology players, while sustaining unproductive “zombies” and incentivizing corporate buybacks over real asset capital deepening.

Now, fast forward to 2020. As we know, COVID massively disrupted the world economy and markets. On the surface, and at the moment, it may seem that COVID’s only economic legacy was high inflation or last year’s vicious bear market. But that may be an overly simplistic conclusion. Rather, we see the pandemic having transformed the nature of work and accelerated structural changes that demand new capital investment. In fact, we expect a more dynamic business cycle to unfold, featuring an entirely new set of economic drivers and producing a new roster of market leaders.

To that end, we see five specific demand drivers that have begun to set things in motion and will continue to power this new capex supercycle:

- First, with COVID, companies of all shapes and sizes, especially those in the service sectors, had to digitize their business models for “contactless” experiences. While much of this spending began out of necessity, more of it has shifted towards growth-supporting investments as systemic economy-wide process re-engineering has taken root.

- Second, reductions in the labor force and changes to the idea of work have created structural constraints in the labor market, leading to record levels of tightness and a growing need for employers to substitute capital for labor.

- Third are the dynamics around deglobalization that we see advancing. With the pandemic revealing vulnerabilities in globally integrated supply chains, we expect companies to rethink their global sourcing strategies—a dynamic we’ve already witnessed with the once-in-a-generation passage of an infrastructure bill in Washington.

- Fourth, we see acceleration in decarbonization—especially alongside a more thoughtful approach to hybrid models and managed transitions—which could also support energy-linked capital spending.

- And lastly, we’re seeing a shift in the global geopolitical balance. Adjusting to a new world order could accelerate public and private investments in areas like defense, cybersecurity and public health.

So we think these five animating factors have catalyzed greater capex demand. But, perhaps more profoundly, is the supply side primed to meet this demand? And here we think the answer is clearly “Yes.” In fact, we see four critical underpinnings that will provide capital supply to sustain this capital spending boom.

- Number 1 is the health of private-sector balance sheets, which remains excellent, having improved through more than a decade of deleveraging, regulation and low interest rates.

- Next is the transition of our workforce demography, from aging Boomers to tech-savvy Millennials and native Gen Z-ers that provide the human-capital accelerant that was missing in the last decade.

- Third, unlike the innovations of the past that were concentrated around the smartphone ecosystem and consumer industries, the J-curves of this economic cycle are likely to include technologies that are industrially scalable and could enhance economy-wide profitability because they’re explicitly focused not on the consumer but on the enterprise.

- And fourth, we’re finally moving towards positive real interest rates as the Federal Reserve normalizes policy. This means a departure from the idea of “free money” and related inefficiencies towards optimizing the broader capital allocation framework.

So, all of this put together, we’re looking at an economic transformation. And this is a unique time when the old investing playbooks may not work. In fact, investors accustomed to benefiting from passive index exposure and a Fed eager to prop up the stock markets are apt to be disappointed in this new era. Rather than the tech monopolies of the post-Financial Crisis period of secular stagnation, the winners of our “productivity renaissance” are likely to be in financials, in healthcare, energy, industrials and consumer services sourced from both the public and the private spheres. For listeners wanting to invest in this theme, we advise an active and fundamentally based multi-asset approach, with a readiness to re-position current portfolios towards opportunities in these sectors.

Finally, and I know I went through the demand and supply drivers quickly for the sake of time, but we did just publish a Special Report that explores many of these themes in much more detail. If you’d like to learn more, as always, please ask your Morgan Stanley Financial Advisor for a copy—and reach out if you have any questions about portfolio strategies. Thank you for listening, and we look forward to continuing to discuss markets with you in 2023. Happy, healthy new year.. 

A powerful and transformative multi-year capital investment cycle is emerging, which could usher in an era of higher economic growth and new market leadership. What does this mean for investors?


Lisa Shalett is Morgan Stanley Wealth Management’s chief investment officer, a member of the Global Investment Committee and a regular contributor to CNBC, Bloomberg and other financial news outlets, where she helps sift the signal from the noise.

Visit Wealth Management Portfolio Insights for more market commentary and insights from Lisa and her team at Morgan Stanley. Find more audiocasts

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