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- Underneath all the fanfare around AI are serious economic risks facing the US today.
- These include historically high interest rates, recession risks, and slowing growth in China.
- Here are the bleak economic realities the US is grappling with, despite all the excitement over AI.
Investor excitement over the rise of artificial intelligence may be obscuring some serious risks facing the US economy today.
The world of business and finance has been abuzz with hype over the groundbreaking technology following the sensational debut of OpenAI’s ChatGPT – and that has fueled a sizzling rally in tech stocks, seen valuations of AI-friendly companies surge sky-high, and inflated the wealth of Big-Tech CEOs.
But underneath it all is a US economy faced with some bleak realities, painting a picture of stark contrast with the bullishness of the stock market.
Here are the some of main economic risks facing the nation today amid all the AI craze.
High interest rates
The Federal Reserve raised interest rates by 500 basis points in the past 15 months – the steepest surge in four decades – to tame historically high inflation. Benchmark rates in the US are currently the highest since 2007, just before the global financial crisis erupted.
And while the Fed has succeeded in lowering inflation significantly and left rates unchanged this month, it still signaled two more 25-basis-point increases by year-end. The annual pace of consumer-price increases has fallen to 4% from last year’s peak of 9.1%, but still remains twice the central bank’s 2% target.
That could aggravate the risk of an economic downturn, according to multiple market experts. Higher borrowing costs have already hurt interest-rate sensitive sectors of the US economy, including the banking industry and the commercial real-estate market.
Some investors are worried US stocks are next in line to suffer if the Fed continues to tighten policy. That’s encouraged short sellers to bet more than $1 trillion against US equities despite their current bull run.
Recession risk
Given the prospects of higher rates and sticky inflation, market commentators including economist Nouriel Roubini and Elon Musk, as well as Wall Street banks such as JPMorgan, have warned of a looming US recession.
According to the Fed itself, its recession probability model shows there’s a 70% chance the US economy will experience an economic downturn by May 2024.
That could even put a dent in the AI hype, according to OANDA senior market analyst Kelvin Wong.
“Overall, a higher for longer interest-rates environment is likely to further increase the costs of funding coupled with an impending global recession that may put downside pressure on corporates’ profit margins,” he said in a daily newsletter.
“Given all other things being equal, such a scenario will likely trim corporates’ budgets and demand for technology hardware and software upgrades that could put a dampening effect on the current bout of AI optimism,” Wong added.
Commercial real-estate troubles
A commercial real-estate crisis may be brewing in the US, with tens of billions of dollars worth of assets slipping into distressed category as high interest rates squeeze borrowers.
The amount of troubled CRE assets, meaning properties that are forced to be sold as owners can’t afford to pay their mortgages, jumped by 10% in the first quarter to about $64 billion, per an MSCI Real Assets report, cited by Bloomberg. Another $155 billion of assets may be at risk of turning bad, according to the outlet.
CRE mortgage delinquencies rose to 3% in the first three months of 2023, according to the Mortgage Bankers Association.
US commercial property owners have struggled over the past year as steep interest-rate increases by the Federal Reserve – aimed at cooling inflation – chipped away at their ability to meet mortgage payments. At the same time, tightening credit conditions and work-from-home trends are adding pressure on the industry.
It’s sparked widespread concern that commercial property could be the next industry to slip into turmoil, following the banking-sector chaos of recent months.
China’s economic slowdown
While the US economy is grappling with internal economic problems, it also faces external risks: predominantly, slowing growth in China.
After years of lockdown under Beijing’s strict zero-COVID policy, economists were hopeful that the Asian economy would experience a strong rebound after it reopened this year. But that’s far from what’s happened.
As Insider’s Linette Lopez reports, China’s economy is in more trouble than anyone thought, with trade slowing, weak industrial production numbers, and piling debt – and that’s a problem for Wall Street.
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