Charles Steindel

April saw little change in state labor markets.  Five states saw statistically significant gains in jobs in March, with none larger than .4 percent. Texas’s .3 percentage point gain amounted to 37,700 jobs.  A number of states had insignificant declines.

Four states (DC, Iowa, Massachusetts, and Virginia) had statistically significant increases in their unemployment rates, with DC and Massachusetts up .2 percentage points and Iowa and Virginia up .1 percentage point. Nevada’s rate fell .1 percentage point and Indiana was down .2.  The highest unemployment rates were in  DC (5.8%), Nevada (5.6%), Michigan (5.5%) California (5.3%), and Kentucky (5.2%).  Hawaii, Montana,  North Dakota, South Dakota, and Vermont had unemployment rates under 3.0%, while  South Dakota’s 1.8% was yet again  the lowest in the nation.

Puerto Rico’s unemployment rate was again unchanged at 5.3% and the island’s job count moved up by 1,100.

State Labor Markets in April 2025

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The Federal Reserve Bank of Philadelphia’s state coincident indexes in April were rather soft.  In the one-month changes, Nevada’s  fairly modest .55 percent increase was the largest, with Indiana the only other state with a gain higher than .5 percent. 12 states showed declines; all except Arkansas were in the Northeast and Middle West. Massachusetts had the largest decline (.47 percent). Over the three months ending in April seven states were down (again, all except Arkansas in the Northeast and Middle West), with Massachusetts on the bottom (down .67 percent) here as well. West Virginia’s 1.54 percent was the largest gain, while 9 other states had increases above 1 percent.  Over the last twelve months, Iowa and Michigan  were down, and eight others saw increases of less than one percent. No state had an increase higher than four percent (Utah was up 3.55 percent), and only three were at or higher than three percent.

The independently estimated national estimates of growth over the last three and twelve months were, respectively, .46 and 2.34 percent. Both measures appear to be a bit weaker  than the state numbers would have suggested.

State Coincident Indexes in April 2025

Andrew Cates

In Kevin Gaynor’s last post (see [Crowding Out](https://www.haver.com/articles/can-gov-deficits-crowd-out-ai-capex-no-so-higher-household-savings-required-plus-evidence-of-more-friction-in-funding-capital-account-surpluses)) he argued that fears of public borrowing crowding out private investment—particularly the surge in AI-driven capex—were likely misplaced. The real challenge is not whether savings will adjust—they must, by definition—but rather what shifts in prices, policy, or expectations will be required to expand household savings sufficiently to finance both government and corporate borrowing. In a world where global capital no longer flows as freely, that adjustment process becomes central.

There is also a deeper and more consequential issue lurking beneath these concerns: **will the recent wave of AI-related investment actually deliver the productivity renaissance that markets now seem to be pricing in?** The recent rally in equity markets—led by tech and infrastructure names—has been powered as much by narrative as by numbers, with investors embracing a vision of AI that promises to transform corporate efficiency and unlock a new era of structurally higher trend growth.

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But that optimism carries risks. If the payoff from this capex boom proves slower or smaller than expected—if productivity gains remain elusive or uneven—it could puncture the market’s confidence in both the technology itself and the vast infrastructure build-out it demands. In that sense, AI is shaping up as a high-stakes macro bet: one that either justifies the new valuation regime, or exposes it as another case of over-extrapolated hype.

The good news, as we illustrate below, is that **latest US productivity data suggest a renaissance may be underway**. The bad news is that this momentum is far from global. In Europe and much of the developed world, productivity growth remains anaemic—held back by high real energy prices, slower AI adoption, and more rigid labour and regulatory frameworks. And even in the US, the scale and durability of recent gains remain uncertain—early signals are noisy, and capex cycles take time to translate into broad output effects.

Furthermore, if the surge in AI-related spending continues to push real yields higher without delivering a commensurate lift in productivity, the result could be a more painful repricing of both equity and credit markets. In that sense, the stakes are not just financial—they are macroeconomic. AI could yet prove to be the next great global growth engine. But it could also turn out to be a capital-intensive detour in a world economy still constrained by deeper structural imbalances.

**US Renaissance?**

Let’s start, though, with some positives. Recent US data offer genuine encouragement. Non-financial corporate productivity—measured as output per hour—rose by 4.2% year-on-year in 2024, marking one of the strongest gains in around 15 years. One year doesn’t make a trend, but the timing is notable: the rebound has coincided with a sharp acceleration in AI-related investment, particularly in cloud computing, automation, and data infrastructure (see charts below.

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However, as the second chart above shows, this capex resurgence has been heavily concentrated in the US—and even there, it appears to have come at the expense of other types of investment, such as structures, plant, and industrial equipment. That matters. It highlights both the opportunities and the limitations of the current cycle: much of the investment is digital, asset-light, and energy-intensive. It is not—at least not yet—a broad-based retooling of the real economy.

Moreover, recent productivity gains may not be solely attributable to AI. A sharp decline in real US energy prices—especially electricity—has probably improved margins and reduced input costs, effectively boosting measured productivity. If those gains prove transitory, the headline improvements may fade.

**Beyond the US**

In addition to this and reflecting those non-US capex observations above the picture remains much less promising in Europe. In the region as a whole productivity growth continues to flatline, with no obvious signs of an AI-led inflection. Structural headwinds in the meantime abound: **elevated energy costs** continue to drag on industrial margins and deter capital formation; labour market rigidities slow down reallocation; and persistent fiscal constraints hinder public co-investment in digital infrastructure.

The story is much the same elsewhere. Japan remains constrained by demographic drag and an underdeveloped AI investment ecosystem. Canada and Australia arguably remain more cyclically tied to commodities than to high-tech capex. And across much of the developing world, energy constraints, financing costs, and institutional limitations all act as brakes on productivity-enhancing transformation.

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This growing divergence, moreover, has meaningful macro consequences. If only a handful of economies—chiefly the US—are experiencing tangible productivity gains, then a global rise in real yields may prove more damaging than expected. For countries with stagnant productivity but rising capital costs, the risk is a squeeze: **financial tightening without a growth offset**, undermining both investment and fiscal sustainability. It’s a familiar story in _The Age of Constraints_—a world where energy, capital, and even knowledge diffusion are no longer abundant or frictionless.

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**The Bottom Line?**

The AI investment boom could continue to support US productivity-linked assets, especially in tech and digital infrastructure. But the broader global investment outlook remains fragile—clouded by **rising capital costs, trade frictions**, and a widening divergence in productivity performance. While US real yields may reflect stronger growth potential, the sustainability of that narrative still hinge on whether productivity gains persist—and whether US households are willing and able to save enough to fund the investment surge without triggering a broader tightening of financial conditions.

Crucially and perhaps obviously, **US trade protectionism adds another layer of risk**. By raising input costs, splintering supply chains, and curbing global capital mobility, tariff policy may ultimately weaken the very investment cycle it seeks to shield.

So yes, markets may be right to price a more productive future. But in the age of constraints, **capital is no longer cheap, global isn’t frictionless, and growth has to be earned**.

The Bond Market Is Also Asking a Bigger Question About Productivity

Kevin Gaynor

•	**Rising real yields reflect structural shifts:** Long-end yields are climbing not just due to inflation fears but rising real rates, suggesting expectations of stronger trend growth, higher risk premia, or tighter global capital supply.

•	**Surge in capex demand:** A coming wave of AI-driven investment, especially in the U.S., could significantly boost corporate capex, mirroring the dot-com boom and pushing the corporate sector into a net borrowing position again.

•	**Large fiscal deficits projected in most major economies:** It’s not just a US story: China running an 8% government deficit through to 2030, and worsening budget positions in Germany and Japan.

•	**Global savings-investment imbalance tightening:** Post-GFC changes, like reduced capital mobility, mean countries are increasingly reliant on domestic savings to fund investment and deficits—requiring higher interest rates.

•	**Sustained higher equilibrium rates likely:** With large fiscal deficits across major economies and higher private investment needs, the bond market may be signaling a long-term rise in equilibrium interest rates (r*), ending the era of cheap money.

For better or worse markets had (more Trump trade headlines as I write) substantially reduced estimates for a recession this year. Betting markets have reflected the same sentiment. Our own measure of cross market implied growth has recovered smartly pushing implied vols back down in many markets.

But across all major markets back end yields have continued to trend higher - a process that began post Covid, paused for a bit and then started again last year before accelerating over recent weeks.

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This is a bit odd when we look at front end yields which have been falling over the past couple of years as headline inflation declined. Japan is an outlier here (which partly explains the particularly acute sell off in long dated JGBs compared to the rest).

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There are good cyclical reasons for this latest sell off: the risk of recession owing to outlandish “sudden stop” tariffs levels is seen as having declined, but Mr Trump is still causing import prices to rise (in the US, but surely one side effect is lower prices overseas as US import demand falls) and US official and non-official labour supply to decline.

Cyclically the economy remains at or close to full employment and measures of the output gap indicate little spare capacity. And now fiscal policy will remain loose! How can the Fed cut rates in that sort of environment - in fact may they need to raise them? But those factors aren’t at play to the same extent in the rest of the world (ex Japan which now has core inflation over 3% - which is a really big, and currently ignored, story for global yields).

It’s also interesting that US implied swaption vol doesn’t appear to have spiked suggesting this is an orderly rather than a panic sell off or conversely that real net selling is happening rather than hedging or playing the swaption vol surface.

And finally it is very interesting that the increase in nominal yields has been mostly comprised of increases in real yields usually a sign of stronger trend growth (r* anyone?), funding squeezes, or increasing risk aversion. It is true that US Sov CDS has increased during the recent tariff kerfuffle - but that has not been the case for other sovereigns.

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Sure, where the US yield curve moves the rest of the world follows and US spreads to other major markets have increased so perhaps this is a purely US phenomenon cyclical/supply phenomenon which is merely dragging other countries along.

But Andy and I wonder if this relatively orderly increase in real yields over the past few years is telling us something important about global investment vs savings across government, corporate and households and something about a retrenchment in global investment and savings flows (or how easy it is to finance current account deficits).

Everyone (and their dog) is now bored of saving/investment identities. But we know a few things now about the outlook.

First, that the GOP fiscal plan will either worsen or leave the US structural deficit position worse off. Certainly if there is a recession in the next few years this is a terrible starting point for the subsequent deficit balloon.

Second, if tech folks and consultants like McKinsey’s are right, we are at the start of very large global capex increase to roll out machine learning LLMs and agents.

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This points to an increase in net corporate investment in the US. lower taxes and lower government spending. If Mr Trump wants to reduce the capital account surplus at the same time then only higher household savings can square the circle. Perhaps bond yields are telling us something about the future interest rate required to move the US domestic savings market toward a higher rate of flow.

Its worth thinking about the capex side for a moment. It might surprise you but the US actually only adds to its net capital stock at a run rate of about 3% of GDP (see chart below).

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Gross capex is a lot higher but the vast majority of it is replacement capex to deal with depreciation. Yes, these are GDP stats from the BEA so they are estimates but it is a reality that mature economies with large capital stocks need a lot of capex just to stand still. And, as newer capital goods have much faster depreciation rates than real world stuff capital consumption will keep rising.

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Therefore if McKinsey’s estimate of $7trn by 2030 to build out AI infrastructure is in the right ball park, and half of it happens in the US then about $700bn would need to be spent per annum. **_That represents about a 66% increase in net capex and a 16% increase in gross capex._**

Using the most recent GDP numbers net capex would rise to about 6% of GDP from below 3% now. No way you say? **_May I refer you to the dot.com boom - you can see it in the chart above for net capex. Corporate net capex peaked out at around the same rate then and the corporate sector saving/investment balance went negative for almost 5 years._**

But there’s more. Consider the IMF’s government deficit projections till the decade end for the major bond markets (chart below). I hope you are as surprised as I am. China is projected to run deficits of 8% through to 2030, France around 6% and Germany and Japan are both worsening too. The UK stands out, but Mr Starmer is rowing back fast.

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And of course if everyone is going AI and robot capex crazy then corporate sector capex everywhere should rise too leading to either smaller corporate surpluses or deficits. 
That need not require an increase in household saving rates if countries can run capital account surpluses easily and (relatively) cheaply using funding from excess saving countries. But is that still the case structurally let alone cyclically (with China running lower capital account deficits and still controling the thing, stopping the inevitable wall of money that would like to “diversify”)?

The charts below are fascinating (I would think that!). They are scatter charts of a cross country panel of savings and capex rates as a % of GDP from the World Bank database. 

In a completely closed capital account world you really have no choice but to fund your own investment with your own savings. You’d therefore expect to see a very strong correlation between domestic savings and investment across economies - a 45 degree line and a high r^2 for your trend line.

In a completely open capital account world there need be no relationship between the points. Kent’s saving rate doesn't determine it’s capex rate. So you’d expect a poor correlation between national savings and national investment rates. Clearly this doesn’t mean, if everyone has their own currency, that interest rates would be the same everywhere. Instead they would clear along with the currency to ensure, globally, that savings = investments. If there’s a global central bank helping along (ahem, the Fed?) then so much the better.

I compare three years: 1996, 2006 and 2023 (the last data points available). In 1996 the correlation was pretty good with outliers - you basically didn’t have a completely free and frictionless capital market system.

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But 2006 - picked to be just before the start of the GFC - starts to hint at a very strong change in the relationship. The correlation had dropped substantially. Some may recall at the time discussions about this - capital accounts opening, easy trade finance, and western banks running large overseas USD loan books. Funding deficits was easier and high capex countries could go for growth.

But the 2023 relationship is really quite worrying. It shows an even better fit than the pre-2000s. National savings and investment rates are more correlated now than they were almost 30 years ago. We understand some of the reasons why; the roll back of international banking post GFC is one. But others a lot more complex.

In this world funding domestic government and corporate deficits is either more expensive, since you have to attract foreign capital which has lower elasticity and less market depth (ie larger price moves to attract flow), or because you have to increase your domestic savings rate through higher interest rates to clear domestic S-I balances without any central bank policy moves.

Yes, central banks could monetise government deficits instead, re-entering a QE phase, but they are (mostly) independent and we are not in a deflationary environment any more. This isn’t likely. In fact any attempt to do so could be catastrophic for currencies and long dated yields.

So yes, there are clearly cyclical reasons for a steeper curve and bar a recession its tough to see a route to much rates soon - with Japan playing a key role in the recent sell off. But if this analysis is correct the bond market may be telling us something very important about the demand for funds and the international supply of those funds on a trend basis.

If this is the trend then higher equilibrium rates are here to stay for a long time (with the normal cyclical overlay). Having had a long period of cheap money leverage levels across economies will need to fall as a result.

Can Gov Deficits crowd out AI Capex? No! So, higher household savings required. Plus, evidence of more friction in funding capital account surpluses

**Geopolitics, AI, and the New Digital Divide**
In the final part of this series, we turn from the physical and technological constraints on growth to the geopolitical ones. Part I highlighted structural headwinds in the world’s labor, capital, and energy markets. Part II explored the potential of AI to act as a macro workaround—while warning that it is not immune to physical limits, particularly energy. Part III brings these threads together: AI is not just a labor-saving innovation or a capital redeployment tool. It is increasingly becoming a geostrategic asset—one whose deployment depends heavily on energy availability, infrastructure, and political control.

**1. AI as a Tool of Statecraft**
What oil was to 20th-century power, processing power is becoming in the 21st. Nations are now racing to dominate the AI value chain—from chip design and fabrication, to data access, to the energy systems needed to power high-performance computing. Export controls, industrial policy, and national security reviews are no longer confined to oil tankers and pipelines—they now apply to GPUs and data centers.

The result is a world increasingly defined not by technological openness, but by fragmentation. From Trump's protectionist agenda—including tightened semiconductor export controls—to the strategic ambitions of the US CHIPS Act under the previous administration, and China’s intensified homegrown AI efforts, digital sovereignty has become an explicit geopolitical objective. The once-celebrated ideal of borderless innovation is yielding rapidly to a harsher reality: national power now hinges increasingly on digital dominance and technological self-reliance.

**2. The Energy Arms Race Beneath the Silicon**
If the second in this series taught us anything, it’s that AI is not ethereal—it’s physical. It runs on electricity, minerals, and metals. It demands stable grids, high-capacity cooling, and energy infrastructure on a scale few countries currently possess. AI isn’t just compute-intensive. It’s energy-intensive. And that shifts the locus of global competition.
The new AI geopolitics is not just a chip race. It is quite literally a power race. Countries that control abundant, cheap, and low-carbon energy will gain a disproportionate advantage in AI scalability. Those that don’t, risk falling behind, regardless of their tech ambitions.

As such, energy security is fast becoming the ultimate gating factor in the AI revolution. Just as the post-WTO growth boom in the 2000s was fueled by a surge in real energy consumption and prices, the AI boom may repeat that pattern—only faster, and more unevenly distributed.


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**3. A World Fragmented by Friction**
As nations impose restrictions on chip exports, data flows, and even model deployment, we risk an increasingly fractured innovation landscape. Collaboration may give way to parallel AI ecosystems—each shaped by its own regulatory, infrastructural, and geopolitical constraints.

That has productivity implications. But it also has energy implications. Redundant infrastructure, an inefficient allocation of resources, and competitive overbuilding could all amplify energy demand—piling more pressure on already strained grids and commodity markets.

In this world, scarcity compounds: chip scarcity, talent scarcity, energy scarcity. The illusion that AI could magically transcend physical limits could fade. And in its place could find a sobering realization: AI will intensify the very constraints it was meant to bypass.

**Conclusion: No AI Without Energy**
The world is not running out of intelligence—but it may be running short of the power needed to scale it. In this final installment of the Age of Constraints, we've argued that the AI revolution is not an escape from resource limits. It is an acceleration into them. Geopolitical frictions, rising energy costs, and physical infrastructure bottlenecks will shape not only who leads in AI, but how widely its benefits are shared.

In the end, there is no intelligence without energy. And there is no geopolitical edge without the ability to turn that intelligence into action—reliably, affordably, and at scale.



State Labor Markets in April 2025

Charles Steindel

More Viewpoints

State Coincident Indexes in April 2025

The Bond Market Is Also Asking a Bigger Question About Productivity

Can Gov Deficits crowd out AI Capex? No! So, higher household savings required. Plus, evidence of more friction in funding capital account surpluses

The Age of Constraints, Part III