Sharmila Whelan

India has confounded expectations, weathering the latest Iran war-induced energy price shock far better than previous crises. Recall 2011–14, when Brent averaged over US$100/bbl for four consecutive years, and 2022, when oil surged to US$123/bbl. Economic growth slowed sharply during both episodes.

This time, despite some moderation in the second quarter, real GDP growth averaged 8.2% YoY in 1H26, up from 6.8% in 1H25. Consumption remains resilient, investment is accelerating and exports have rebounded (Figure 1).

261102SW1.jpg

Source: Haver Analytics & Westbourne Research

Fundamentals are considerably healthier. The current-account deficit was running at just 0.7% of GDP in 2Q26, compared with 5% in 2013 and 2.6% in 2022. Foreign exchange reserves stand at US$608bn, providing 8.7 months of import cover. Unlike 2011, when India's credit-fuelled malinvestment bubble was bursting, banks and corporates are in rude health. Non-performing loans are at record lows and corporate leverage is modest.

The question is whether this resilience marks the beginning of a sustainable economic upswing or another government-supported recovery that ultimately runs out of steam.

**Corporate India is in good shape**
Our business-cycle indicators have improved. The corporate profit cycle remains firmly in upswing, with listed-sector returns on equity holding above their pre-pandemic seven-year average. Both EBITDA and gross margins are expanding, signalling improving pricing power, operating efficiency and cost control (Figure 2).

261102SW2.jpg

The message from Crisil Ratings is similarly encouraging. Across 7,200 companies, rating upgrades outnumbered downgrades by 464 to 213 in the first half of the fiscal year. Around 40% of upgrades were concentrated in secondary steel, auto components, capital goods and infrastructure, supported by stronger order books and improving cash flows.

There are casualties from higher energy costs, weak exports and Chinese competition, notably ceramics, polyester textiles and selected engineering businesses. Airlines, speciality chemicals and flexible packaging are also vulnerable should the energy shock persist.

Nevertheless, corporate balance sheets remain robust. Crisil expects interest coverage ratios to hold at a healthy 5.2 times this fiscal year. Revenue prospects are particularly strong in renewables, defence, data centres and auto components.

**Investment is recovering. But who is investing?**
The most encouraging development is the acceleration in real investment spending, up 11.8% YoY in 2Q26 following 10.4% in 1Q26. This represents the strongest first-half investment performance since 2022.

Manufacturing capacity utilisation has reached 76%, industrial production is strengthening, capital goods imports are rising and corporate bank lending is expanding at double-digit rates.

Could this finally be the long-awaited sustainable investment upswing?

We remain unconvinced.

The problem is that government spending continues to do much of the heavy lifting. Delhi has budgeted US$133bn for roads, railways, defence and telecommunications this fiscal year, an 11.5% increase. Including broader capital commitments, spending rises to US$187bn, up 22% YoY.

Frontloaded public investment has generated positive multiplier effects, particularly for infrastructure, capital goods and defence companies. Policy incentives are also encouraging investment in data centres, renewables and other new-generation industries.

But private investment remains narrow, concentrated among a handful of large conglomerates. Traditional capital-intensive industries are still sitting on the sidelines.

Moreover, Delhi's fiscal room for manoeuvre is shrinking. Tax revenues rose just 3.4% YoY in the first eight months of 2026, against expenditure growth of 9%. Persistently high energy prices threaten higher fuel and fertiliser subsidies. Seven states face elections next year, while the Eighth Pay Commission could increase the wage and pension bill for 6.95 million beneficiaries.

Public investment cannot substitute indefinitely for private investment.

The government is trying to crowd in private capital through infrastructure improvements, structural reforms and free-trade agreements with the UK, Oman, New Zealand and European countries. These offer opportunities for manufacturing, services, technology transfer and investment, including EFTA's US$100bn investment target over 15 years.

But trade agreements alone cannot overcome competitiveness constraints, logistical bottlenecks and the reluctance of private businesses to commit capital.

**Consumption: The fiscal illusion**
Indian consumers, meanwhile, continue spending despite rising energy and living costs. Vehicle sales are booming, household credit growth is accelerating and discretionary spending remains surprisingly resilient (Figure 3).

261102SW3.jpg

Yet we have consistently resisted chasing consumer stocks. That caution has paid off, with consumer durables and FMCG equities performing poorly this year.

Our concern is straightforward. Investment, not consumption, drives a sustainable economic upswing.

Companies invest when prospective returns justify the risks. Rising profits encourage capacity expansion, job creation and higher wages. Employment security and rising real incomes then sustain consumption and broaden the recovery.

India risks putting the cart before the horse.

The current consumption upswing owes much to fiscal transfers rather than a self-sustaining improvement in household incomes.

Today, 18 states provide cash transfers to households. According to Crisil, a median monthly transfer of Rs1,500 covers 74% of expenditure for the poorest rural households and 51% for their urban counterparts.

Another 813 million people, or 55% of the population, receive free foodgrains, while 90–100 million farmers benefit from annual income support. Several states also provide regular cash payments to women.

Add income-tax cuts introduced in April 2025 and GST rationalisation in September, and it is hardly surprising that consumers have absorbed higher living costs while continuing to spend.

Three consecutive good harvests have helped. But agricultural prospects are deteriorating following deficient monsoon rainfall, depleted reservoirs and weak soil moisture across several important farming states.

More importantly, fiscal transfers cannot deliver permanently accelerating consumption growth. Tax reductions provide an initial boost that fades. Cash transfers redistribute purchasing power but do not themselves generate the productivity, employment and wage growth needed to sustain demand.

And here the outlook is less reassuring.

Rural agricultural and non-agricultural wage growth has slowed, while accelerating inflation is eroding real incomes. Although unemployment has fallen to 4%, labour-force participation remains worryingly low at 41%.

Consumption is holding up. The question is for how long.

**Monetary policy adds another headwind**
Fiscal constraints are tightening just as inflation risks are increasing.

Both headline and core inflation are accelerating, while broad money growth points to further upside pressure. The RBI has struggled to fully sterilise an estimated US$41bn of capital inflows following June's incentives to attract non-resident Indian deposits.

Further monetary tightening looks increasingly likely.

For now, the two-year real cost of capital, at approximately zero, remains comfortably within our normal ±2% range. Corporates and households can therefore absorb some additional tightening.

But higher borrowing costs, weakening real incomes and diminishing fiscal support are hardly conducive to a broad-based private investment and consumption recovery.

**Where to invest?**
Our five-signal business-cycle framework now argues for upgrading Indian equities from underweight to neutral, currency hedged.

The profit cycle remains in upswing, supported by expanding margins and resilient returns. Investment and credit-cycle indicators have improved, real borrowing costs remain manageable and valuations are becoming more attractive.

Yet we are resisting the temptation.

The Cockroach Movement protests raise the risk of wider socio-economic unrest should living costs bite harder. But our principal concerns are economic rather than political: the narrowness of the private investment recovery and the dependence of consumption on fiscal support.

India's fundamentals are stronger than during previous energy shocks. Corporate balance sheets are healthy, investment is accelerating and the government has made meaningful progress on infrastructure and reform.

What remains unproven is whether private investment can take over from government spending and generate the employment, wages and real income growth needed to sustain the expansion.

That is the missing link.

We will therefore hold our underweight position until our November visit to Delhi, when discussions with policymakers, businesses and economists should provide a clearer picture of whether India's investment recovery has genuine staying power.

India

India: Stronger Fundamentals, Familiar Fault Lines

Joel Prakken

I, and many others, have argued that following the AI buildout, investments in AI will eventually undermine labor's share of income as the declining cost of AI encourages firms aggressively to substitute computers and software for humans in the workforce.

The Bureau of Labor Statistics (BLS) will not release its estimates of third-quarter productivity and costs - including labor's share of Gross Value Added (GVA) - until Thursday of this week. However, if one knows where to look in last week's preliminary estimate of the National Income and Product Accounts for the third quarter, one can calculate the most recent share for the business sector by subtracting from total compensation of employees both the compensation of general government employees and the compensation paid by private households and nonprofit institutions serving households, and then divide the residual by the GVA of the business sector.

The recent history of that calculation is depicted in the chart.  Following the introduction of ChatGPT in late 2023 there was no immediate decline in labor's share of income. However, in 2025 that share began slipping, and by the third quarter of 2026 it dropped to 49.1%, the lowest reading recorded in the quarterly data back to 1947.

261102JP1.jpg

Granted, this is short interval and other factors might be at work.  However, while certainly not definitive, these latest numbers at least hint at the emergence of the impact of AI in the aggregate macro data other than in the obvious facets of AI buildout. Let’s see what the BLS reports on Thursday.

Labor’s Share of Income Falls to All-Time Low in Third Quarter

US labor's share of total income at a series low

Higher energy prices providing most of the boost to recent increase in EA inflation

Despite resilient economy, US consumers are not very happy

Weakness in Chinese investment is spreading

Benchmark revision shows less worrisome US inflation

Recent increases in US long-term rates surprisingly little impacted by inflation expectations

Even with strong capex, US nonfinancial corporations are generating more cash than they are investing

Investor sentiment worldwide is positive, especially in AI-led Asia

Sectoral shift in US job openings

Meteoric rise in AI-related semiconductor exports fueling South Korea's export boom

Regional Fed surveys showing further manufacturing acceleration in August

Sharp drop in China demand for oil helping to limit impact of Middle East conflict on the price

Decades high real price of copper posing physical challenge to investment boom

Rising US long-term real yields point to strong demand for investment funding

US retail sales accelerate even as consumers remain gloomy

Retail gasoline price still well above pre-conflict level and now rising again

PMIs showing widespread revival of global economy

Crude oil price has returned to pre-conflict level but traffic through Hormuz still subpar

Surging orders for computers and electronics propelling durable goods orders

Next year's inflation forecasts are on the rise and above target

Disrupted global supply chains placing upward pressure on US goods prices

Construction of data centers has overtaken transportation construction in US

Elevated energy prices putting intense upward pressure on input prices around the globe

US is big leader in global surge in private AI investment

Larger-than-usual income tax refunds this year are supporting consumer spending

Our global data offering is unparalleled in terms of coverage, quality, and organization. We offer 290+ databases from 2500 government and private sources, a wealth of key survey and forecast data covering the world’s economies, and a robust offering of archive databases that drive machine learning for big data applications.

Optimized for precision analytics, our data is seamlessly integrated with Microsoft Office and all leading statistical packages through our DLX® software and platform independent HaverView™ website. We further offer direct database feeds, client server or cloud-based delivery, and RESTful API.


Privacy Policy

Disclaimer

Contact us

Service Health

A premier time series data platform for the global strategy, research, and quant communities. 

New York

Tokyo

London

Singapore

Economy in Brief

Viewpoints

Contact Us

Our Data

Our Products

What We Do

Our Authors

About Us

Data News

Featured Data Additions

Resources

Release Calendars

Training Center

Webinars

Newsletters

Download Software

For Clients

Live Updates

Andrew Cates

The AI investment boom has become a source of demand for semiconductor exporters, equipment manufacturers and energy suppliers across the world. Its continued expansion increasingly depends on political consent as well as finance and technology. Resistance to data centres remains a modest immediate constraint, but delays could spread through supply chains and markets whose expectations assume rapid growth. For investors, the vulnerability lies in how widely exposure to the same spending cycle has spread.

The United States remains at the centre of that cycle. Its significance, however, is global. Asian producers supply chips and electronic components; European and Japanese manufacturers provide sophisticated equipment; and utilities and commodity producers are investing to meet the build-out's requirements. Pension funds, insurers and other investors share the financial exposure through global equity portfolios.

**A global investment cycle**
Four forces reinforce the expansion. Rising equity valuations improve financing conditions. Cheaper capital supports investment. That spending generates revenues and profits for suppliers, helping sustain the valuations that encourage further investment. The schematic traces this loop and the channels through which it reaches the wider economy.

261110AC1.jpg

Asia provides the clearest evidence of the international transmission. Semiconductors account for roughly two-fifths of South Korean exports, twice their share four years ago. Taiwan also has substantial exposure. Strong technology demand has supported more optimistic growth forecasts, but it has increased dependence on the investment decisions of a relatively small group of customers.

261110AC2.jpg

The supply chain extends well beyond chips. European and Japanese equipment makers benefit from semiconductor investment, while turbines, grid equipment, copper, steel and concrete are needed to build and power data centres. The benefits reach economies with very different industrial structures. Their exposure nevertheless has a common source: expectations that infrastructure spending will keep expanding.

That distinction matters. A slowdown need not involve a collapse in spending. Suppliers can face weaker orders and earnings growth simply because investment ceases to accelerate. Projects elsewhere in the supply chain may then become harder to justify.

**Profits and valuations reinforce the exposure**
US data illustrate the connection. Since late 2022, additional investment has been closely matched by rising profits in the sectors supplying equipment and services. This is an accounting relationship, not proof that every dollar of spending creates an equivalent profit. It nevertheless shows how closely the investment and earnings cycles have become linked.

261110AC3.jpg

High valuations support the process. Tobin's Q, which compares US equity values with the replacement cost of corporate assets, stands at roughly twice its long-run average. The measure requires caution: conventional replacement-cost estimates omit much intangible capital, and its relationship with investment has weakened as both have become more concentrated. Even so, a sustained market reversal could make further expansion harder to finance.

261110AC4.jpg

The financial consequences would be international. The weight of US equities in global portfolios exposes institutions and households far beyond America to the same earnings expectations. A correction could therefore weaken wealth and confidence alongside demand for the equipment and materials used in construction.

**Consent becomes an economic constraint**
Political resistance reaches the cycle through a different channel. Restrictions on data-centre construction can delay physical investment before their effects appear in market prices. US local opposition and campaigns in parts of Europe raise a broader question: can the industry secure consent quickly enough to meet its plans?

The immediate threat should not be overstated. Relatively few projects have been delayed, and investment commitments, jobs and financial concessions may yet secure approval. But longer planning timelines and more costly agreements could reduce the pace of expansion even without widespread prohibitions. Financing a project and obtaining permission to build it are separate requirements.

Strong profits offer some protection. Today's boom has a firmer earnings foundation than the late-1990s technology surge. Yet those earnings must remain sustainable, while computing equipment with an economic life of perhaps three or four years brings depreciation costs that will increasingly weigh on reported profits.

The central risk is a mismatch between the timing of AI's benefits and the expectations embedded in current investment plans. Slower spending, weaker supplier earnings and lower equity valuations could reinforce one another, transmitting the adjustment across borders. The scale is uncertain, but the breadth of exposure makes it a global macroeconomic issue.

Technological revolutions can deliver enormous benefits without rewarding every investment. For the world economy, the question is how smoothly the transition from infrastructure spending to broader productivity gains proceeds. Political consent now joins capital, computing power and electricity among the conditions shaping that transition. The benefits of AI may be widely shared; so, increasingly, are the risks of an interrupted build-out.

The AI Boom and the Price of Permission

Ethan Harris

One of my core views is that investors should consider the whole range of supply shocks, rather than focus on AI and the Iran war. The trade war is not over, immigrant reduction policy will continue to constrain labor force growth, and if a recent Fed study is correct, the El Nino weather event could boost US inflation by 1% next year.

**Team Transitory 2.0**

A popular view is that most of the recent inflation is transitory. Optimists argue that the pass through from tariffs to consumer prices is largely complete. Once the Iran war is over energy prices will tumble bringing down headline inflation and reducing the spillover effects on the core. On top of this, as Warsh and others argue, AI investments may be inflationary in the short run, but over time they will be a big boost to productivity, putting downward pressure on costs and inflation. If inflation will return to target on its own, the Fed does not need to be hiking rates.

261103EH1.jpg

**A full accounting**

I’m not drinking the Kool-Aid. I assume that the Iran war will eventually come to an end, and energy prices will come down, but I have no idea when that will happen. By my count, the Trump Administration has forecast a near-term end to the energy shock more than forty times since the war started. The timing also matters for AI. In the short run the AI buildout is inflationary and it could be a long time before, the disinflationary effects become clear.

The bigger story is that Team Transitory underestimates the persistence of other supply shocks. The supply of labor is very weak due to immigration reduction policy and the aging population. Both aren’t going away any time soon. There are a bunch of new tariffs in train, and an escalation of the trade war is likely after the election. The huge 6% of GDP budget deficit is also here to stay, drawing capital away from the private sector.

Finally, adverse weather events impact the productive capacity of the economy, both by disrupting activity and by diverting investment to mitigate their impact. My sense is that the inflationary impact of climate change has been small so far but will certainly build over time.

261103EH2.jpg

https://www.frbsf.org/research-and-insights/publications/economic-letter/2026/11/impact-of-el-nino-on-us-economy/

The immediate challenge is the El Nino weather event—a shift in trade winds in the Pacific that causes changes in weather. A new piece from the San Fran Fed looks at “[The Impact of El Niño on the U.S. Economy](https://www.frbsf.org/research-and-insights/publications/economic-letter/2026/11/impact-of-el-nino-on-us-economy/).” As the chart above suggests, this is the strongest event in many years. Using data for El Nino’s since the 1950s the study estimates that the current event added about 0.3% to the price level this summer and if its followed by a La Niña it will add about a percentage point to inflation next year (Chart below).

261103EH3.jpg

**The big picture**

With all the cross currents in the economy, it is important to look at the whole picture rather than focus on one or two stories. For example, Warsh’s “Task Force on Productivity and Jobs” only looks at the potentially most positive supply side shock—the implementation of AI. Warsh has said AI is “the most productivity-enhancing wave of our lifetimes—past, present or future.” Given the composition of the task force, I’m sure they will agree. However, the more relevant question is how AI fits in with the many other supply shocks hitting the economy.

Sorting through this complicated picture, my guess is that inflation will prove quite resilient. Warsh and the doves on the FOMC think the Fed only needs to remove a “dose” of accommodation to bring inflation down. They do not need to put “sand in the gears” of the economy. I disagree, bringing inflation down requires tight monetary policy to offset both strong demand and persistent supply shocks. Hiking the funds rate three more times, to 4.6%, could do the trick.

Even the weather is inflationary

Mickey D. Levy

With the U.S. economy growing at a healthy clip and unemployment low, many people ask: Are workers paid appropriately? The rise in stock market valuations, high home prices and the soaring wealth of artificial-intelligence innovators make the question even more urgent. On a topic so central to fairness and living standards, it’s important to use data that carefully measure and evaluate compensation. In particular, the benchmarks we look to need to account for inflation and reflect worker productivity.

In the years prior to Covid, when adjusted for inflation, show that wage compensation—total wages and salaries plus supplements such as employer contributions to pensions and savings plans—closely tracked productivity gains (Chart 1). The 2020s have been a different story. Wages have increased significantly, but persistently high inflation has undercut those gains. Consequently, while real wages have increased, they haven’t kept pace with worker productivity. No wonder surveys show Americans losing confidence in the economy. Persistent inflation is the culprit.

261102ML1.jpg

Another measure that is getting a lot of attention but is highly misleading is the labor-compensation share of gross domestic product. It shows how much wages have fallen relative to GDP. Critics compare the labor-compensation share with the ratios of profits and returns to capital to GDP, which are rising. Too many economists who refer to these ratios and base their observations on them do not carefully think about what their numerators and denominators measure and what they don’t--and inadvertently are mixing apples and oranges.

In fact, in an advancing economy with healthy growth and innovations, it’s natural and unsurprising that the labor-compensation share of GDP falls while profits and returns to capital rise. Chart 2 shows wage compensation as a percent of GDP, often referred to as the “labor share”. Chart 3 shows corporate operating profits, the S&P500 (including dividend reinvestment) and nominal GDP, all indexed to 2000=100. Profits and returns to capital are rising sharply as a share of GDP.

261102ML2.jpg

261102ML3.jpg

Thinking through the data, particularly what GDP measures and what it doesn’t, helps to explain how rising profits and returns to capital are largely complements to worker compensation and enhance economic well-being. Yet this measure of wage compensation to GDP is widely used to suggest that companies and capitalists are getting ahead at the expense of workers.

I would like to see wage compensation to rise and catch up to productivity gains. The persistent inflation makes it an uphill struggle. Many businesses may find that raising worker compensation reduces job turnover and lowers business operating costs and improves business efficiency. But in any case, misusing data muddles the issue.

GDP measures what is produced in the U.S. by both domestic and foreign companies. In its most familiar expenditure form, GDP covers consumption and business and residential investment spending (largely spending on new construction and improvements) and government purchases (largely spending that absorbs national resources but not transfer payments like Social Security) plus exports minus imports. (U.S. National income, a closely related counterpart to GDP, measures the total income earned by residents, but diverges from GDP in the short-run, reflecting changes in net income from abroad, capital depreciation and statistical discrepancies.  Like GDP, it is not a good basis for evaluating the fairness of worker wage compensation).

You can see how the labor share in Chart 1 can be misinterpreted. When businesses increase investment—say, for new computers or a new production facility-- it adds arithmetically to GDP and lowers the ratio of wages to GDP.  Yet the investment is clearly a positive for the economy and enhances workers’ productive capacity.

**_It’s important to keep in mind what GDP doesn’t include, and here’s how comparing the labor share of GDP to profits or returns to capital as a percent of GDP is flawed analysis. While U.S. workers are compensated for their contributions to domestic production, U.S. businesses’ activities overseas, involving overseas employees (either U.S. citizens or foreign) and production generate profits and boost returns on capital, but are largely uncounted in U.S. GDP._**

Among S&P 500 companies, an estimated one-third of employees work overseas and one-third of revenues and an even higher share of profits are generated overseas. Smaller firms have substantially less international activity, but the overseas activities of large multinational U.S. firms significantly affect the aggregate data. Goods produced overseas by subsidiaries of U.S. businesses are counted in GNP (gross national product) but not GDP. Goods produced overseas by non-U.S. firms that are critical part of supply chains of U.S. companies also largely fall outside of U.S. GDP. Nevertheless, they too may add significantly to the well-being of U.S. consumers and provide net benefits to U.S. workers. No wonder profits and returns to capital are rising compared to GDP.

Apple Inc. is a good modern example of a U.S.-based company that relies heavily on overseas production and global supply chains. Nearly all of Apple’s iPhones, laptops and other hardware are made and assembled overseas by companies that aren’t subsidiaries of Apple. Those Apple products sold internationally (60% to 65%) don’t show up in U.S. GDP. The 35% to 40% of Apple goods that are purchased in the U.S. have little impact on GDP, as imports largely offset domestic consumption. But they have boosted Apple’s profits, and have helped lift its capitalization to around $5 trillion. The economic benefits to U.S. consumers and Apple’s 80,000 domestic employees and many other U.S. workers are obvious. **_Such benefits are not reflected by comparing the labor share of GDP to the ratios of profits and returns to capital divided by GDP._**

U.S. workers’ far larger concern is the persistent inflation that has raised the consumer-price index more than 30% since late 2019. For many working households, prices of necessities have risen even faster (Charts 4 and 5). Food prices are up more than 34%, and the cost of childcare and preschool more than 31%. Gasoline prices are up 54%, and automobile insurance and maintenance combined are up about 50%. For the 34% of households that don’t own their dwellings, rental costs are up 34%. Taxes, too, cut into take-home pay.

261102ML4.jpg

261102ML5.jpg

261102ML6.jpg

Employment gains and low unemployment help, but the Fed’s excessive monetary easing has contributed to persistent high inflation and the increased value of long-lived asset prices, benefitting homeowners and stockholders. The Federal Reserve’s consecutive zero rates and extensive purchases of mortgage-backed securities in 2020-21 helped boost housing values more than 50%, but that raised costs for renters and put home prices out of reach for many potential buyers (Chart 6). Note that the Fed’s target of 2% inflation means prices will still rise but at a slower pace. The Fed should achieve its 2% target. After that, however, it should seriously reconsider its notion that 2% inflation amounts to price stability.

Viewpoints: November 2026

Jump to:

India: Stronger Fundamentals, Familiar Fault Lines

Labor’s Share of Income Falls to All-Time Low in Third Quarter