RCM Managed Asset Portfolio: Short-Term GDP growth
RCM Managed Asset Portfolio
By Christopher Chiu, CFA
March 2026
Short-Term GDP growth
While some parts of the American economy look weak, other parts are strong. For example, the labor picture looks bleak for many Americans, but the industrial base is becoming revitalized as a result of reshored manufacturing and the buildout of a new kind of capital equipment for AI. For now, this mixture of good and bad averages out to the appearance of positive GDP growth. I want to take you through two different approaches to GDP that may explain what is happening.
There are two ways to calculate GDP that I am aware of. One is the famous Keynesian model which most economists use to make short term predictions about future GDP. The other, less well-known method is used to explain the past trajectory of a country’s GDP growth. This is the Robert Solow model. The Keynesian model is more forward looking; the Solow model, more backward looking. We will go through the major components of each model to explain why GDP growth continues to look positive for the short-term even as parts of the economy are weak.
Keynes calculation of GDP and GDP Growth
In Keynes’s model GDP = C + I + G + (X − M), where: C = private consumption, I = gross investment, G = government spending, X = exports, and M = imports.
While this GDP model can look daunting because of the algebraic notation, it’s simple to understand. It is simply (1) a way to count the final goods produced in an economy for a given time-period. These variables account for the total production of only final goods (and not works-in-progress) in order to prevent double counting. (2) In the second step, the growth is calculated based on how these totals of final goods change from one time-period to another. This logical approach can calculate GDP growth rate by comparing one quarter to another quarter and then annualizing the growth rate, or conversely just making a year-to-year comparison.
Positives and Negatives
In the US economy what is currently bolstering GDP growth is private spending. Private consumption (C) continues to grow and positively contributes to GDP growth despite some pressure on consumer spending. Also, investment (I) is contributing most unexpectedly to GDP growth, as corporations are using cash to build the data centers and the infrastructure associated with the development of AI. Previously this was just cash on balance sheets, or it was debt that had not yet been raised from lenders. In other words, it was dormant capital and not contributing much to the finished goods that count toward economic growth. But now it is capital that is being deployed to get a significant return. Much of this investment (I) comes from the large hyperscalers, but it also comes from the companies supplying the housing, energy, and communication infrastructure for that AI.
What is limiting GDP growth is government spending (G), as government spending is finally declining year over year. Also, what is limiting GDP growth is exports minus imports (X-M). Despite the weaker dollar and exports being cheaper, we still import more than we export. Overall, using the inputs of the Keynesian model, we can see that it is consumer spending, and, most importantly, AI infrastructure spending, which is additive to GDP growth in the near future.
The Solow Growth Model
Robert Solow’s GDP growth model is even simpler than the Keynes model. It does not rely on aggregating totals of finished goods and then comparing one period’s totals to another. Instead, it relies on primarily two factors, with a smaller third factor as an explainer of what cannot be quantified. In the Solow growth model, GDP growth is primarily a function of (1) a country’s supply of labor, (2) its capital stock, and (3) its productivity or its ability to use technology (TFP). This is the basic Solow equation.
GDP growth = .7 labor growth + .3 capital stock growth + TFP
What the Solow model shows is that in the long run, after tracking decades of a country’s data, what contributed most to a country’s development or GDP growth was its supply of labor and capital. For example, a one percent increase in labor led to a .7 percent increase in GDP growth; a one percent increase in the capital stock led to .3 percent rise in GDP growth.
Labor is meant simply as able, willing, and available workers. Capital stock is defined as the infrastructure, factories of machinery and tooling necessary to create finished goods and services. Since the growth of the labor supply will increase the rate at which a country grows, this explains why developed countries with slowly growing populations will pursue immigration policies often to the detriment of the employment opportunities of their existing citizens. Even if the capital stock of a country does not rise, if the labor supply is increased, it will result in GDP growth according to this model.
This model also explains GDP growth, if the capital stock is increased and labor is held constant. If one looks at the examples of East Asian countries, which had large populations in the 1950s, they did not grow GDP significantly until their capital stock was increased. Often the simplest piece of capital to get a country started towards economic development is a sewing machine. And factories of sewing machines can start the development process of migrating peasants from the countryside to the city where this labor can be combined with such capital. And the more trained a labor population becomes, it can move up the value chain with more productive levels of capital. A country capable of manufacturing may also eventually produce raw steel and subsequently machines made from that steel such as automobiles. In doing so, these countries did not create a new development path but followed the same path the first industrialized country, Great Britian, did almost two centuries earlier when it began manufacturing textile products and then eventually producing steel and building railroads.
In the current US economy, a slower-growing labor population, resulting from current immigration policy enforcement, will limit GDP growth according to the Solow model. And yet, even with these limitations US GDP is expected to grow by most estimates. What explains this continuing growth is the growth of the capital stock and its changing nature and the productivity that comes with using it. While a country’s capital stock is always changing, as old machinery depreciates and is replaced with newer models, our capital stock in the US is probably undergoing change that is more than simply replacement, as the type of capital that is being built becomes even more orientated around the digital. This move has already started with datacenters being built to capture information for the Internet and e-commerce, but now that change is no doubt accelerating as the capital is being used to create AI models that make business processes more productive.
Conclusion
What these two models mean for us is that the increasing capital stock of the United States is increasing GDP. In the Keynes model the growth of investment (I) is an increase of capital as a finished product that is an output counting toward GDP growth. In the Solow model, growth of GDP is a result of increasing the capital stock. In both cases, increasing capital is a factor in GDP growth. So long as the US labor picture does not become dire and overwhelm the gains from increased capital, we should expect GDP growth to continue to be positive in the short term.
