AI Investment and Strong Corporate Profits: Positive Signals for the U.S. Economy Identified by Fed Chair - Bloomberg

[Mexico City = Shim Young-jae, Correspondent] Kevin Warsh, Chair of the U.S. Federal Reserve (Fed), stated that when making monetary policy decisions, he focuses on corporate investment and profits, credit markets, consumption, employment, inflation, and expected inflation. Most indicators signal that the U.S. economy is robust, but the inflation rate still exceeds the Fed's target of 2%.

According to Bloomberg, Warsh mentioned in a recent speech at Jackson Hole that if there is no confidence that inflation is meaningfully slowing, the Fed has "work to do." However, some signs of moderation have appeared in recent price indicators, making it crucial to assess both the strong growth of the economy and price trends for future monetary policy.

Surge in AI Investment and Strong Corporate Profits... Few Signs of Tightening in Credit Markets

On the 2nd (local time), Bloomberg reported that Warsh presented key indicators he focuses on when assessing the U.S. economy during his speech last week in Jackson Hole, Wyoming. Bloomberg evaluated that most of the indicators mentioned by Warsh send positive signals for the U.S. economy.

Warsh described corporate capital expenditures as the "seeds of future economic growth." With technology companies investing hundreds of billions of dollars in AI-related equipment and infrastructure, U.S. non-residential fixed investment increased by 8.5% year-on-year in the second quarter.

He noted that the growth rate of investment in equipment and intangible assets over the last four quarters is about 9%, the highest since 2021. It is estimated that more than half of this year's increase in capital expenditures is related to AI development.

Corporate profits are also maintaining high levels. According to the U.S. Bureau of Economic Analysis (BEA), the share of after-tax corporate profits in total value added rose to 19.4% in the second quarter, up from 18.2% in the previous quarter. This is the highest level since statistics began in the 1940s.

Warsh stated that profits of S&P 500 companies have increased by more than 20% over the past year, and historically, profit margins are at a significantly high level.

In the credit market, the effects of monetary tightening are not clearly evident.

Warsh explained that the credit spreads for corporate bonds and leveraged loans are at historically low levels. The Fed's Senior Loan Officer Opinion Survey (SLOOS) also indicates that corporate lending standards are historically relatively relaxed.

He stated, "The credit market and lending market show almost no constraints from monetary policy."

Consumption and Employment Remain Strong... "Labor Market Aligns with Full Employment"

Consumption is also an indicator that Warsh pays attention to.

According to Bloomberg, contrary to expectations that consumption would slow due to persistent inflation, real consumer spending adjusted for prices showed strong momentum in the second quarter. However, in July, consumption showed signs of stagnation.

Warsh stated that private domestic final purchases, which show the basic demand in the private sector excluding government spending, inventories, and net exports, increased by about 3% this year.

He noted that this indicator often provides a better signal about economic trends than GDP, and he assessed that the current trend is positive.

He also expressed a judgment that the labor market is stable.

While acknowledging that job mobility is at a low level, Warsh explained that this is due to the large-scale workforce reallocation that occurred between companies and workers after the COVID-19 pandemic. He believes that the low growth rate of labor supply may naturally limit the increase in employment.

He mentioned that while there are some vulnerable areas, "those who want to work are generally maintaining or seeking jobs," indicating that the current labor market aligns with full employment.

Inflation Exceeds 2% Target... 54% of PCE Components Rise Over 3%

While the U.S. economy remains robust, inflation is a key indicator that Warsh is wary of.

The core Personal Consumption Expenditures (PCE) price index rose by 0.2% from the previous month and by 3.3% from the same month last year in July. Although it still exceeds the Fed's price target of 2%, recent indicators show some signs of easing price pressures.

Bloomberg reported that considering the stagnation in consumer spending in July and signs of price moderation, some analysts believe that the Fed may have room to maintain interest rates.

Warsh stated that to understand the fundamental trends of prices, he examines the 199 individual items that make up the PCE price index.

Over the past 12 months, 54% of the PCE components, including goods and services, have seen prices rise by more than 3%. This is significantly lower than the approximately 77% recorded during the COVID-19 pandemic but still high compared to the 32% seen in the 20 years prior to the pandemic.

Warsh views expected inflation as a key indicator for assessing the credibility of monetary policy.

He positively assessed that expected inflation has remained stable despite inflation exceeding the Fed's target for five years.

However, he emphasized that caution should not be relaxed. Warsh warned that market expectations for inflation can appear stable for a long time and then change suddenly, stating, "While current expected inflation is well anchored, it needs to be closely monitored."

Bloomberg explained that the list of indicators presented by Warsh does not encompass all criteria for assessing the U.S. economy. Warsh himself has indicated that the Fed will reconsider how it analyzes economic indicators.

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