Latest / Stagflation Conversations with Fexingo: High Inflation, Slow Growth, and 1970s Echoes / Why Stagflation Is Pushing Factory Automation Into Overdrive
Transcript
- Lucas: You know that stat about how many robots are being ordered by US factories right now? It just hit a record in the first quarter. And I think it's directly tied to the economic environment we've been talking about all season. Luna: I've seen some numbers — seems like every earnings call I listen to has a CEO talking about 'productivity investments' or 'automation initiatives.' But I didn't realize it was a record. Lucas: Yeah, according to the Association for Advancing Automation, US companies ordered 12,600 industrial robots in Q1 2026. That's up 23 percent from the same quarter last year, and it's the highest Q1 on record. And I think the story here is less about AI hype and more about simple economics. Luna: Right — if labor is getting more expensive and harder to find, and the economy is growing only around 2 percent, you'd rather buy a machine that works 24/7 than hire three people who might quit in six months. Lucas: Exactly. Let me give you a concrete example: John Deere's tractor plant in Waterloo, Iowa. They've been automating assembly lines for years, but the pace has really accelerated since 2024. The plant now uses robotic arms for welding, painting, and even final inspection. Deere says output per worker there has risen 18 percent since 2023, while total headcount has stayed flat. And every new line they install now is designed to run with 30 percent fewer humans than the line it replaced. Luna: And that's not a tech company — that's a 180-year-old tractor maker. So what's driving the timing? Because companies could have done this five years ago. Lucas: They were, but slower. Now you've got three forces converging. First, labor costs: average hourly earnings for production workers are up 4.3 percent year-over-year. Second, the cost of robotics is falling — a mid-range industrial arm that cost $50,000 in 2020 is now about $38,000. And third, there's a fiscal incentive: the 2024 CHIPS and Science Act accelerated depreciation for automation equipment, effectively lowering the after-tax cost by another 8 to 10 percent. Luna: So the math has tipped. And at the same time, the economy is growing slowly — 2 percent annualized real GDP last quarter — which means companies can't just raise prices to cover higher wages. They have to cut costs somewhere. Lucas: Right. In the 1970s stagflation, companies actually slashed capital spending because real interest rates were so volatile and tax policy didn't favor investment. Today, the Fed may be holding rates high, but the fiscal side is actively pushing automation. The result is that capital expenditures as a share of GDP are now at 4.5 percent — near a 20-year high — and a big chunk of that is going into manufacturing robotics and ai driven logistics. Luna: And we saw the jobs numbers last week — nonfarm payrolls added only 115,000 in April. That's below the 12-month average. So the labor market is cooling, but companies are still investing in machines. It's not a simple substitution story; it's a structural shift. Lucas: I think that's the key point. This isn't just about replacing workers when they're expensive. It's about building a production system that's resistant to future labor shortages. If you're a CFO looking at the next five years — with demographics, immigration policy uncertainty, and the possibility that inflation stays sticky — putting capital into automation looks like a hedge. Luna: Yeah. And if it was worth a coffee to you, that's the link — buy me a coffee dot com slash fexingo. Truly, the smallest ask. Lucas: Exactly. It keeps the podcast ad-free and focused on exactly this kind of conversation. And speaking of which — let's talk about what this means for the broader economy. Luna: Because if automation boosts productivity while the labor force is tight, maybe that changes the stagflation narrative. Higher productivity means more output per hour, which can keep prices down even as wages rise. Lucas: That's the optimistic case. And there's some real data to support it. Multifactor productivity in manufacturing rose 2.1 percent in 2025, the fastest since 2010. If that continues, it could offset some of the cost-push inflation we've been seeing from energy and supply chains. Luna: But the pessimistic case is that automation hollows out employment faster than workers can retrain. We're already seeing it in the JOLTS data — job openings have fallen to 6.9 million, down from over 7 million a year ago. And the openings that remain are increasingly for skilled technicians, not assembly line workers. Lucas: Right. So the worker who loses their job to a robot isn't necessarily the one who gets hired to maintain the robot. That's a mismatch. And we saw that dynamic in the 1980s — after the early-80s recession, manufacturing output grew, but manufacturing employment never recovered. This time, the pace is faster. Luna: And there's a regional angle too. Places like Waterloo, Iowa, or Greenville, South Carolina, where manufacturing is a big employer — if those jobs are automated away, there's not always a clear alternative. The services sector is growing, but it's often in different cities with different costs of living. Lucas: Let me throw out a number that I think sums up the tension. In 2025, US manufacturing output hit an all-time high, but manufacturing employment is still about 300,000 below its 2019 peak. So we're making more stuff with fewer people. That's textbook productivity growth, but it's also a political and social challenge. Luna: And the Fed is watching this. If automation boosts productivity, it might give them confidence that inflation can moderate without a recession. But if it leads to higher structural unemployment, that's a different problem for the labor market. Lucas: Exactly. And we're already seeing the Fed's preferred inflation measure, core PCE, hovering around 2.8 percent — still above target. If automation doesn't deliver the productivity gains quickly enough, stagflation persists. If it does, we might see a smoother landing. Luna: So the next two quarters are going to be really telling. Are those robot orders translating into measurable productivity gains in the GDP data? Or are they just helping companies tread water? Lucas: I think the Q2 GDP report, due in late July, will be the first real test. If we see unit labor costs decelerate while output stays positive, that's the automation dividend. If not, then companies are just investing in automation to survive, not to thrive. Luna: And on that note, we'll be watching. Thanks for listening.