Artificial Intelligence: from a gift to a curse?
The resilience of the US economy masks vulnerabilities: the “circularity” of tech giants investing in each other; the growing big-tech debt burden; the need for AI capital expenditure to generate a return on investment. If the AI-driven momentum were to falter, the wealth effect that has buoyed consumer spending and capital expenditure could unwind, and US economic resilience with it.
For now, high-income earners, who account for 50% of US consumption, continue to spend and invest, buoyed by wage growth and asset appreciation – particularly the value of AI-related stocks in their portfolios. However, any disruption in equity markets could disproportionately impact high income consumers, potentially triggering a broader economic slowdown.
Under such a negative scenario, which is not our base case, the K-shaped economy would close from the top. This could feature a drop in AI capital expenditure, a drop in market returns from the Magnificent Seven tech stocks, and – as a result – a drop in discretionary spending by the wealthiest Americans. This could lead to a recession.
While this scenario is very much a bear case, it is true to say that corporate take-up of AI is still lagging that of consumers. We have seen the adoption of AI in the retail sector – although monetisation is falling short of expectations. Adoption in the corporate world has not taken off yet. This needs to happen. If it does not, bond vigilantes may comeback and force a pause in AI capital expenditure. US households are increasingly exposed to fluctuations in the stock market. Equities now account for a higher share of US household assets than real estate. What is more, stock ownership is strongly concentrated among the wealthiest 10% of US households. Their discretionary spending is more volatile than lower-income groups’ spending.
Over the last 45 years, equities have been a far more volatile asset class than real estate. It follows that a stock market sell-off could trigger a reverse wealth effect that impacts the wider economy. This is not our main scenario, though it is essential to protect against it.
Equities and real estate as a share of household assets (% of total)
The resilience of the US economy masks vulnerabilities. If the AI-driven momentum were to falter, the wealth effect that has buoyed the economy could unwind and the K-shaped economy would close from the top.
1 — Consumer spending
US: consumer confidence by income bracket (Morning Consult)
2 — Capital expenditure
US private investment growth, with and without AI capex spending
3 — Mag 7 market return
S&P 500 index versus Magnificent 7 performance
