Banking giant Morgan Stanley sees three forces adding momentum to the US economy despite recent weakness in the labor market.
In a new podcast, Morgan Stanley says deficit-financed government spending remains a powerful source of economic stimulus.
“This deficit, running at about 6.5% of the size of the whole economy, is providing stimulus. It’s only been larger during the Great Financial Crisis, COVID, and World War II. It’s punch.”
Looking at US corporations, the bank says AI and technology firms are in the midst of a historic spending wave.
“We here at Morgan Stanley think that AI-related spending could amount to one of the largest waves of investment ever recorded, dwarfing the shale boom of the 2010s and the telecommunications spending of the late 1990s. Importantly, we think this spending is ramping up right now.
Morgan Stanley estimates that investments by large tech companies will increase by 70% this year. And between 2024 and 2027, we think this spending is going to go up by two and a half times.”
The third factor is a shift in US banking regulations.
“My bank research colleagues believe that lower capital requirements for US banks could boost their balance sheet capacity by an additional $1 trillion in risk-weighted terms, and a more supportive regulatory environment for mergers should help activity there continue to grow. Again, more punch.”
While multiple liquidity sources flood the US economy, Morgan Stanley believes that the Fed will continue its rate-cutting cycle well into next year.
“We think that the Fed is set to cut rates five more times to a midpoint of [2.875%]. The Fed’s supportive efforts are based on a real fear that labor markets are already starting to slow, despite the other supportive factors mentioned previously. And a broad weakening of the economy would absolutely warrant such support from the Fed.”
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