Quick note here to follow up on the macro crystal ball post I wrote a couple of weeks ago (link here for subs). Michael Msika over at Bloomberg had a piece out on the return of capex powering the next rally. And for me it connected a lot of dots. Let me outline my thinking below.
What I wrote in the macro crystal ball piece was this:
there is a sequencing that I am looking for though. The sequence goes from consumers’ wages to consumption to industrial production to capital spending and corporate profits. That means wages should be key to the strength and durability of a recovery. While employment and capital spending are lagging indicators, rather than drivers of the business cycle.
So, in the wake of massive government transfers that have kept household balance sheets intact, we can look to employment trends to judge whether this cycle has legs. In Europe, employment schemes like Germany’s Kurzarbeit framework combine with the boost from government transfers to mean the first leg of the sequence from wages has been shored up. In the US, we are seeing lots of wage gains as the re-opening proceeds. Yesterday, I saw that Bob Burgess picked up on this and connected it to the potential for capex gains.
Is this the makings of a wage-price spiral or a one-time step change from poverty wages to a livable income?
I believe we’re seeing the latter. If so, it means a secular shift higher in consumption, giving companies reasons to invest instead of doing buybacks https://t.co/JTWt9YWlbt
— Edward Harrison (@edwardnh) June 9, 2021
Later I saw the Msika piece on the Bloomberg Markets Live blog, where he wrote about Europe:
Companies are ramping up spending in the post-pandemic world, increasingly favoring investments and expansion over returning money to shareholders. That’s likely to boost economic growth but also create stock market winners.
On point. Here’s the best chart he used.
He’s saying exactly what I was saying: when you see large segments of your clientele with cash to spend and wage growth that means they will be able to spend more into the future since wages are sticky, you will want to invest in the future. Companies on both sides of the Atlantic are seeing that at the moment. And that means there is greater prospect of a durable non-secular stagnation upturn.
And to piggyback on what Msika is saying about Europe, remember this chart. I posted it in May.
It’s telling you there is room to run in Europe. And as Msika says, there will be stock market winners. He sees capital goods, oil services, technology, materials and carmakers with commercial units benefitting. That’s something to watch as Europe plays catchup to the US.
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Facts Only
Edward Harrison wrote a macroeconomic analysis outlining a sequence for durable GDP growth: wages → consumption → industrial production → capital spending → corporate profits.
Government transfers have supported household balance sheets, particularly in Europe through programs like Germany’s Kurzarbeit.
Wage gains in the U.S. are observed as the economy reopens, potentially driving higher consumption.
Bob Burgess connected wage growth to potential increases in capital expenditure (capex).
Michael Msika of Bloomberg reported that European companies are favoring investments and expansion over shareholder returns.
Msika identified sectors likely to benefit: capital goods, oil services, technology, materials, and carmakers with commercial units.
Harrison suggests wage increases reflect a shift to livable incomes rather than a wage-price spiral.
The analysis argues that sticky wage growth could lead to sustained consumption, encouraging corporate investment.
A chart referenced in May indicated room for economic growth in Europe.
The narrative posits a potential durable upturn, contrasting with secular stagnation theories.
Executive Summary
Full Take
The strongest version of this narrative is that wage growth, supported by government interventions and post-pandemic reopening, is creating a virtuous cycle: higher consumption leads to corporate investment, which in turn drives durable economic expansion. This model gives credit to policy responses like Germany’s Kurzarbeit and U.S. stimulus for stabilizing household finances, while also acknowledging the role of private-sector confidence in translating wage gains into capex. The argument is coherent and supported by observable trends in both the U.S. and Europe, where companies are reportedly shifting from buybacks to investment.
However, the narrative leans heavily on the assumption that wage growth is secular rather than cyclical, which may overlook structural labor market challenges or inflationary pressures. The claim that wage increases reflect a "one-time step change" to livable incomes, rather than a spiral, is presented as fact but remains speculative. Additionally, the focus on corporate investment as a panacea for growth risks downplaying other factors like productivity, debt levels, or geopolitical risks. The piece also implicitly endorses a Keynesian demand-driven model of growth, which may not account for supply-side constraints or the potential for malinvestment in the highlighted sectors.
Root cause: This narrative reflects a post-2008 paradigm shift toward demand-side economics, where wage growth and consumption are seen as primary drivers of recovery. It assumes that corporate behavior is responsive to labor market conditions rather than financialization incentives, a departure from the pre-pandemic era of shareholder primacy.
Implications: If correct, this model suggests a more equitable growth path, where workers’ income gains translate into broader economic benefits. However, if wage growth outpaces productivity or corporate investment fails to materialize, the result could be stagflation or asset bubbles in the favored sectors. The stock market winners identified (e.g., capital goods, tech) may see inflated valuations, while other industries or labor segments could be left behind.
Bridge questions: What evidence would indicate that wage growth is truly secular rather than temporary? How might corporate investment patterns differ if inflation erodes consumer purchasing power? Are there historical precedents where similar wage-consumption-investment cycles led to sustainable growth—or to imbalances?
Counterstrike scan: A coordinated influence campaign pushing this narrative might exaggerate the durability of wage growth, downplay inflation risks, and selectively highlight corporate investment while ignoring debt or productivity concerns. The actual content does not match this pattern; it presents a reasoned argument with acknowledged uncertainties and avoids overt manipulation. The analysis remains within the bounds of legitimate economic debate.
Patterns detected: none