How to Invest for a New U.S. Productivity Boom

Apr 13, 2023

The coming years could bring stronger economic growth, greater business productivity and a new set of stock market winners. How can investors benefit?

Lisa Shalett

The Next American Productivity Renaissance

A transformative multi-year capital investment cycle is emerging, which could usher in an era of higher economic growth and new stock-market leadership. Morgan Stanley Wealth Management's Lisa Shalett explains what this means for investors.

Source: Morgan Stanley

My name is Lisa Shalett and I'm the Chief Investment Officer here at Morgan Stanley Wealth Management. Our most recent report is the "Next American Productivity Renaissance". And the thesis of the report is basically that we think COVID instigated a fundamental change in the business cycle. What we're saying is that in the next business cycle we're going to have a whole new set of winners in the stock market.

COVID really helped accelerate some of the other drivers of capital spending that were already starting to take shape. So the first is around supply chain reorganization and deglobalization. What COVID did was really illuminate how interconnected our global supply chains were and how that created perhaps uncomfortable dependencies. A second trend is really around decarbonization. The first step was really reducing America's dependency on imported dirty crude oil. Clean and green technologies are now increasingly competitive.

Every business model around the world was forced to contemplate how to exploit technology to digitize. But what's really new, we have a plethora of maturing technologies like artificial intelligence, like machine learning, like natural language processing. And these technologies are really the ones that are coming together to automate service businesses. That's a major enabler.

As we think about the next business cycle, we think we're going to have a very different composition of leadership in the stock market. And that's a function of a very different economy. We believe health care is going to be transformed, energy is going to be transformed, industrials, the infrastructure. And it's this change in market leadership.

We're going to have all these trends. This explosion of new technologies that are giving us incentives to invest. And that is so important to advancing innovation and progress in our economy. 

Key Takeaways

  • The pandemic shocked the economy, unleashing new supply and demand trends now igniting a powerful boom in capital investment.
  • Digitalization of business models, shifting supply chains and decarbonization are driving this “American productivity renaissance.”
  • Investors looking to benefit should consider financials, healthcare, energy, industrials and consumer services.

The pandemic delivered a once-in-a-generation shock to the economy. But as the world recovers, a silver lining has emerged: That economic upheaval has also unleashed an entirely new combination of supply and demand trends that are igniting a powerful boom in capital investment by U.S. businesses.


Morgan Stanley’s Global Investment Committee believes this surge in new business spending could supercharge the economy, spurring stronger growth, greater productivity and more widespread prosperity over the next several years.


This “American productivity renaissance” is a key theme that investors should consider as they position their portfolios for the years ahead.


A New Investment Landscape Emerges

Recall that much of the last economic cycle, which started on the heels of the 2007-2008 Great Financial Crisis, saw slow growth, low inflation and interest rates, and lackluster productivity in the U.S. Staggeringly, this period also saw some of the strongest financial market returns of all time, with U.S. stocks compounding at close to 15% per year, twice the average rate, and bonds advancing at more than 6% per year.


It was in this environment that COVID struck, accelerating structural changes already taking place in the economy, such as automation of service businesses and shifts in global supply chains. As these changes gain steam, we believe businesses must now invest more heavily in productivity-boosting capital assets, from enhanced computing infrastructure to new AI technology—creating opportunities for investors in the companies that are meeting these needs. 


Capital Spending Catalysts for a New SuperCycle

Over the next several years, we see five transformational demand-related trends sparking resurgent capital spending:

  1. 1
    Digitalization of business models:

    The pandemic required companies of all shapes and sizes to digitize their business models for “contactless” customer experiences. This catalyzed the first resurgence in capital spending, or “capex,” for the U.S. economy since the 2013-2014 boom in hydraulic fracking. 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.

  2. 2
    Tighter labor markets:

    COVID-related health issues, as well as a pandemic-era increase in retirements and surging self-employment, have led to historic tightness in the labor market. With fewer available workers and upward pressure on wages, employers need to automate more jobs, likely bringing down business costs and, in many cases, enabling employees to shift skills to more productive roles.

  3. 3
    Realignment of supply chains:

    The pandemic revealed vulnerabilities in globally integrated supply chains, leading companies to rethink their global sourcing strategies. Many companies in the U.S. are investing more in domestic production, energized by the passage of such spending bills as: 

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

  4. 4
    The energy transition:

    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 U.S. auto fleet.

  5. 5
    A new “multipolar” geopolitical order:

    Rivalries are calcifying between nuclear superpowers, spurring public and private investments in areas such as defense, cybersecurity and public health. For example, with modernization of the U.S. military infrastructure a bipartisan priority in Washington, Department of Defense spending, as a share of annual GDP, is forecast to rise from 4.7% today to the roughly 6% level maintained in the early 2000s following the 9/11 attacks.

Where Capital Will Come From

Four key sources of financial, human and technological capital could fuel the spending boom: 

  1. 1
    Historically healthy balance sheets:

    The U.S. private sector—households, businesses and banks—is enjoying its 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.

  2. 2
    Shifting workforce demographics:

    The U.S. 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. Similar to past such episodes, we think this generational turnover will help accelerate innovation and automation trends, resulting in healthier profits that can support increased capital investment.

  3. 3
    A wave of industrially scalable tech innovation:

    The smartphone ecosystem that emerged during the last economic cycle was revolutionary in how it empowered consumers—but it did little to enhance industrial productivity or income growth. Innovation in the new cycle, however, is likely to feature technologies that are industrially scalable, in areas more likely to boost business productivity and profits, such as data analytics and artificial intelligence, thus generating capital for reinvestment. 

  4. 4
    Monetary policy normalization:

    As the Federal Reserve normalizes policy to tame inflation, the era of negative real interest rates has come to an end. Money is no longer virtually free. We believe higher rates will lead to a more efficient allocation of capital across the economy, starving unsustainable businesses of capital and steering resources toward growing enterprises with the greatest potential to enhance productivity and generate wealth. 

Investing for a New Era of Growth


This new era will likely produce a new set of stock-market winners—and they look a lot different from the high-flying mega-cap tech stocks that dominated market indices during the last cycle.


In fact, investors are apt to be disappointed if they expect to continue benefiting from passive exposure to broad benchmark indices and a Fed seemingly eager to prop up stock markets. Leading investments are likely to be in financials, healthcare, energy, industrials and consumer services. It is time for active stock-picking, based on economic and business fundamentals. In private markets, returns may be higher in private credit than in private equity, and opportunities in commodities and real assets may be superior.


For a list of 25 stocks that our strategists believe could outperform their industry peers as the "American productivity renaissance" plays out, ask your Morgan Stanley Financial Advisor for a copy of the Global Investment Office’s March 28, 2023, AlphaCurrents report, “Capex Captains.” Listen to the audiocast based on this report.  Your Financial Advisor can share specific recommendations that may help your portfolio benefit from the potential boom in capital spending and productivity.


This article is based on Morgan Stanley Wealth Management Chief Investment Officer Lisa Shalett’s Global Investment Committee Special Report from January 4, 2023, “The Next American Productivity Renaissance.” Listen to the audiocast. Connect with your Morgan Stanley Financial Advisor to request a copy of the report and to discuss related investment opportunities. 

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