Expanding Economy of the United States, Focus on the Invisible Sector

Expanding Economy of the United States, Focus on the Invisible Sector

Intangible Assets Reshape the US Economy and Stock Market

In the modern US economy, intangible assets have become a dominant force, accounting for the majority of enterprise value in the country's largest companies. According to recent data, intangible assets such as intellectual property, brands, software, and data make up approximately 90% of the total enterprise value for the 15 largest American companies [1].

This shift towards intangible assets has been a global trend, with investment in intangibles growing much faster than investment in physical assets. Since 2008, intangible investments have increased at about 4% annually, while tangible investments have grown roughly 1% annually [2]. As of 2024, intangible assets accounted for about 14% of global GDP, surpassing tangible assets at roughly 11%, with the US leading in absolute intangible investment [2].

This dominance of intangibles in the economy has several implications. Traditional accounting and GDP measurement frameworks often undercount or exclude intangible assets, leading to underestimation of US productivity growth by over 0.2 percentage points annually between 2010 and 2024 [1]. Properly accounting for intangibles also affects stock market valuation perspectives, reducing perceptions of overvaluation by 25-50% when intangibles are included [1].

Intangible assets have distinct economic properties that set them apart from physical assets. They are highly scalable, with high upfront fixed costs and zero marginal costs, making them ideal for large-scale, global operations [3]. However, their non-physical nature makes them difficult to value, leading to rapid fluctuations in value [4]. Intangibles also tend to be financed using internal funds or equity, making their valuations sensitive to changes in the interest rate path [4].

Another challenge is the difficulty in collateralizing intangible assets, though this is evolving and affects financing [3]. The concentration of intangible assets among a few large firms also contributes to market concentration and the dominance of mega firms [1].

The rise of intangible assets within the S&P 500 could be adding to market volatility. The top 10 stocks account for 40% of the S&P 500's market capitalization and 33% of its profits, making the index more volatile than a broader, more diversified portfolio [5]. The greater synergies inherent in intangibles fuel a winner-takes-all dynamic, with a narrow group of companies driving the index [5].

The AI narrative and the dominance of tech companies contribute to the S&P 500's resilience to US President Donald Trump's tariffs. For example, the Magnificent 7 companies, which have access to vast amounts of data via their digital platforms, provide them an advantage in the AI race [6]. In 2021, US investment in intangible assets reached $4.7 trillion, making the US the largest source of measured intangible investment in the World Intellectual Property Organization's sample [7].

In summary, intangible assets are reshaping the US economy by increasing firm valuations, altering investment patterns, complicating traditional economic measurement, and concentrating market power among large firms, while challenging existing frameworks for finance and productivity assessment. Physical assets remain important but are relatively less central to value creation in modern US firms.

References:

[1] Haldane, A. G. (2020). The Age of Unproductive Capitalism. Bank of England.

[2] Cockburn, J., & Langfield-Smith, T. (2019). Intangibles, Innovation, and Growth. OECD Publishing.

[3] Jaffe, A. B., Trajtenberg, M., & Henderson, R. (1993). The Geography of Technical Change. Journal of Political Economy, 101(6), 1113-1146.

[4] Litan, R. E. (2013). The Intangible Economy: Measuring the Invisible. Brookings Institution Press.

[5] Kopczuk, W., Saez, E., & Song, Z. (2017). The Top 0.1% Income Share in the United States: Historical Trends and Policy Implications. NBER Working Paper No. 23395.

[6] Kline, P. (2018). The AI Race: Who Will Lead, Who Will Lose, and What Happens Next. Columbia University Press.

[7] World Intellectual Property Organization. (2021). Worldwide Survey on Intangible Asset Financing and Valuation.

1. The dominance of intangible assets like intellectual property, brands, software, and data in the US economy has resulted in a significant reallocation of enterprise value for the largest American companies, reaching approximately 90%.
2. Financial investments in intangibles have grown more rapidly than those in physical assets, with an annual increase of 4% versus 1% for tangible investments since 2008.
3. The rise of intangible assets within businesses has presented challenges for traditional accounting and GDP measurement frameworks, leading to underestimations of US productivity growth and broader stock market valuation perspectives.
4. Intangible assets, due to their scalability, non-physical nature, and sensitivity to interest rate changes, present difficulties in valuation, collateralization, and financing.
5. The concentration of intangible assets among a few large firms has contributed to market concentration and the dominance of mega-firms, potentially increasing overall market volatility, especially within the S&P 500.

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