Staff Reporter

Bank of America is expressing confidence in the resilience of the US economy, citing what it describes as a “sustained pickup in labor productivity growth.”

The bank believes this productivity cycle is poised to last, supported by three main factors: a rise in new business formations, decreased regulations, and increased capital investment.

Since 2019, business applications have surged by approximately 37%, particularly in the tech sector, reversing what Bank of America calls a “startup deficit” that had previously hindered productivity.

Additionally, the bank views deregulation as a beneficial influence, especially in sectors like Financials, where regulatory demands have historically been burdensome.

On the investment front, Bank of America points out that the US capital stock is “old, inefficient, and in need of refurbishment.”

After decades of dominance from technology spending, capital expenditures are expanding, driven by fiscal support, the need for data centers, aging infrastructure, and reshoring efforts.

“These structures are now getting equipped with new tools and equipment. This expansion of the capital stock should enhance the economy’s productive capacity over time,” the report notes.

While artificial intelligence (AI) has generated significant buzz as a potential game-changer, Bank of America remains cautious about its immediate effects.

There is currently limited evidence of strong monetization from AI, and it may take time before its impact becomes apparent in macroeconomic data. Recent developments surrounding Deepseek have added further uncertainty, even as US companies continue to increase their investments in AI.

“We don’t expect to see evidence of AI adoption reflected in macroeconomic data anytime soon. For now, it represents an upside risk to our outlook for productivity and growth,” Bank of America stated.

The bank also points out a connection between productivity cycles and stronger returns in the equity markets. “Productivity cycles are usually accompanied by higher interest rates, increased nominal growth, a rise in demand, and above-average returns for the S&P 500.”

Additionally, the increase in hurdle rates may limit the survival of “zombie” companies, which Bank of America argues have been dragging down productivity.

Looking at historical trends, the bank suggests that the current environment resembles the 1980s and 1990s, a time characterized by efficiency gains and higher real interest rates. The S&P 500 risk premium has declined to levels reminiscent of that era, bolstering the bank’s case for sustained economic momentum.

Ultimately, Bank of America views productivity growth as a crucial driver of economic resilience. If this trend continues, the bank believes it could elevate US GDP growth into the 2.0-2.5% range, exceeding many conventional estimates.