The US is currently facing significant economic dangers, notwithstanding all the hype around AI. These include recession concerns, historically high interest rates, and decreasing Chinese economic development. Despite all the excitement around AI, these are the depressing economic realities the US is currently facing.
The euphoria among investors over the development of artificial intelligence may be disguising some significant hazards to the US economy right now.
Following the dramatic introduction of OpenAI’s ChatGPT, the business and financial worlds have been awash in enthusiasm about the ground-breaking technology, which has sparked a raging rally in tech stocks, driven up values of AI-friendly companies, and increased the fortune of Big-Tech CEOs.
But behind it all, the US economy is struggling with some grim realities, which stands in sharp contrast to the stock market’s optimism.
Here are the four key economic concerns that the country is currently facing in the midst of the AI mania.
Recession risk
Market analysts such as Elon Musk and economist Nouriel Roubini, as well as Wall Street firms like JPMorgan, have warned of an impending US recession due to the likelihood of higher rates and persistent inflation.
By May 2024, there is a 70% likelihood that the US economy would be in recession, according to the Fed’s own recession probability model.
According to Kelvin Wong, senior market analyst at OANDA, that may even dampen the AI enthusiasm.
In a daily message, he wrote, “Overall, a higher for longer interest-rate environment is likely to further increase the costs of funding along with an impending global recession that may put downside pressure on corporate profit margins.”
Given all other factors being equal, such a situation will probably reduce business spending and the need for technological updates, which could dampen the present wave of AI excitement, said Wong.
Commercial real-estate troubles
There may be a commercial real estate crisis developing in the US as tens of billions of dollars’ worth of assets fall into the distressed category as borrowers are squeezed by high interest rates.
According to an MSCI Real Assets analysis published by Bloomberg, the value of distressed CRE assets—properties that must be sold because their owners are unable to make their mortgage payments—rose by 10% to nearly $64 billion in the first quarter. According to the publication, another $155 billion in assets may be in jeopardy of going bad.
The proportion of CRE mortgages that were past due rose to 3% in the first quarter of 2023, according to the Mortgage Bankers Association.
The Federal Reserve’s sharp interest rate increases, which were intended to curb inflation, have made it difficult for US commercial property owners to make their mortgage payments. Additionally, the business is under pressure from rising work-from-home trends and tightened financing standards.
It has aroused widespread worry that, after the recent instability in the banking sector, commercial real estate could be the next sector to destabilize.
High interest rates
To combat historically high inflation, the Federal Reserve increased interest rates by 500 basis points over the course of the last 15 months, the largest increase in four decades. In the US, benchmark rates are at their highest level since 2007, shortly before the start of the global financial crisis.
Furthermore, even though the Fed managed to dramatically reduce inflation and kept interest rates constant this month, it still foresaw two additional 25-basis-point rises by year’s end. From a peak of 9.1% last year, the annual rate of consumer price increases has decreased to 4%, but it is still beyond the central bank’s 2% aim.
According to numerous market experts, this could increase the danger of an economic downturn. The banking sector and the commercial real estate market are two areas of the US economy that have already suffered from higher borrowing prices.
Some investors are concerned that if the Fed keeps tightening policy, US stocks would be the next to suffer. Due to this, short sellers have made almost $1 trillion of bets on US stocks despite their present boom market.
China’s economic slowdown
The US economy is battling internal economic issues, but it also confronts external concerns, most notably from China’s slowing growth.
Economists were confident that the Asian economy will revive strongly this year after being closed for years under Beijing’s rigid zero-COVID policy. But it is not at all what has occurred. According to Insider’s Linette Lopez, China’s economy is in worse shape than anyone anticipated due to decreasing trade, dismal industrial production data, and mounting debt, which is problematic for Wall Street.
