A 30-Year Pattern Reversed: Inflation & AI Outlook | ITK With Cathie Wood

The May employment report delivered mixed signals: non-farm payrolls rose 117,000, well above the expected 75,000, while household employment — which captures more small businesses — fell by over 200,000 for the third consecutive month. The average workweek expanded, suggesting companies are asking current employees to work longer rather than hiring new ones, a sign of underlying economic strength. Wage growth, however, came in at just 0.2% monthly (roughly 2.5% annualized), well below the 3% productivity growth rate.

Manufacturing is beginning to take off even as services disappoint. This is significant: services are much larger, but historically when manufacturing leads, services follow. The pickup in manufacturing is likely driven by inventories running too low and capital spending surging. Wood believes this is the early stage of a manufacturing boom, supported by deregulation, accelerated depreciation, and the AI infrastructure buildout. Corporate tax refunds are massive due to accelerated depreciation rules, yet the federal deficit has improved to minus 5.2% of GDP, signaling the economy is stronger than headline reports suggest.

For 30 years, U.S. non-defense capital spending peaked at roughly the same level every cycle. Now it has broken out sharply higher, a pattern that in equity market terms suggests a sustained move after a multi-decade base. Wood attributes this to deregulation, favorable tax policy (accelerated depreciation), and the AI and power infrastructure buildout. Interestingly, even legacy tech names from the telecom bubble — Intel, Corning, Flex (formerly Flextronics), Cisco — are seeing a resurgence as hyperscalers place orders leveraging existing infrastructure. Akamai, a single-digit grower for years, just secured a hyperscaler order to leverage its content delivery network.

Manufacturing construction spending for computers and electronics, however, has declined from $120 billion to $70 billion after the CHIPS Act stimulus in 2022. Wood expects this to reverse and contribute further to the capital spending surge. The trade deficit is widening as imports outpace exports, but she views this as a sign of stronger relative U.S. growth and notes the flip side is a capital surplus — foreign direct investment flowing into the United States.

The Michigan Consumer Sentiment Index just hit a new low, and the personal saving rate has fallen to 3.6% — not because consumers are confident, but because oil prices are squeezing budgets. Auto delinquency rates are back near 2008–09 levels, though Wood notes consumers are more willing to let cars be repossessed now that Uber and Lyft exist as alternatives. Real personal consumption growth has fallen to near zero year-over-year on a three-month moving average basis due to oil.

Yet higher-income earners are still spending stock market gains, and the overall consumption picture is «okay». Wood expects a dramatic reversal once oil prices collapse, which she believes is imminent. The clearing of the housing market, meanwhile, will likely come through price cuts rather than interest rate declines. New home price appreciation is nonexistent, and the inventory of new single-family homes is starting to decline as builders cut prices. Existing home sales remain in recession territory, but the spring selling season was terrible, setting up for a potential rebound if affordability improves.