Will a recovery in the US investment cycle boost Asian economies?

Two elements have been missing in the recovery of the US economy from the 2008 crisis — strong wage growth and renewed capital spending by businesses. Of these two, there are encouraging signs that wage growth is finally gaining some traction: The job market is clearly tightening and wages are firming in response. However, there are still only tentative — and not entirely convincing — indications of a recovery in capital spending. For instance, orders for core capital goods have been edging up only in the past two months — and that only after declining for some time.

This disappointing feature of the US recovery matters for many Asian exporting nations because their export growth is highly correlated with capital spending out of the US. A major determinant of how sustainable the US’ recovery will be and how much benefit it will have for Asian economies hinges on whether capital spending will finally revive. Will 2017 be the year when US businesses regain their animal spirits and step up investment in new plant and equipment?

We think that there is a good chance of such a revival as some of the major determinants of investment are beginning to fall into place. However, we do worry that uncertainty over the incoming Trump Administration’s policy direction could hinder that recovery.