- Behind all the AI hype are the serious economic risks facing the United States today.
- These include historically high interest rates, recession risks and slowing growth in China.
- Despite all the excitement about AI, the dark economic realities facing the United States are:
Investor excitement over the rise of artificial intelligence may obscure some of the serious risks facing the US economy today.
Following the sensational debut of OpenAI’s ChatGPT, the worlds of business and finance are buzzing with hype for groundbreaking technology – and it’s fueling a boom in tech stocks and valuations of AI-friendly companies. Foreheads soared and wealth ballooned. Number of Big Tech CEOs.
However, the bottom line is that the US economy is facing a harsh reality, which is in stark contrast to the bullishness of the stock market.
In the midst of the AI boom, here are some of the key economic risks facing the country today.
high interest rate
To curb historically high inflation, the Fed has raised interest rates by 500 basis points in the last 15 months, the steepest rise in 40 years. US benchmark interest rates are now at their highest since 2007, just before the global financial crisis erupted.
The Fed also managed to bring inflation down significantly, keeping rates on hold this month but signaling two more 25-basis-point rate hikes by the end of the year. The annual pace of consumer price inflation has slowed to 4% from a peak of 9.1% last year, but is still double the central bank’s 2% target.
That could further increase the risk of an economic downturn, according to several market experts. Rising borrowing costs are already hitting interest-rate-sensitive sectors of the U.S. economy, such as the banking industry and the commercial real estate market.
Some investors fear that if the Fed continues to tighten policy, U.S. stocks will be next hit. This has led short sellers to bet more than $1 trillion on U.S. stocks, despite the current bull market.
recession risk
Market commentators such as economists Nouriel Roubini and Elon Musk, and Wall Street banks such as JP Morgan, are warning of an imminent U.S. recession, given the outlook for rising interest rates and persistent inflation.
According to the Fed itself, its recession probability model shows a 70% chance that the U.S. economy will experience a recession by May 2024.
According to Kelvin Wong, senior market analyst at OANDA, it could even add to the AI hype.
“Overall, the high-interest-rate environment, coupled with the imminent global recession, is likely to further increase funding costs, putting downward pressure on corporate profit margins,” he said in a daily newsletter. It may take,” he said.
“All other things being equal, such a scenario would likely cut corporate budgets and technology’s demand for hardware and software upgrades, potentially dampening current AI optimism. There is,” Wong added.
commercial real estate trouble
A possible commercial real estate crisis is brewing in the United States, with tens of billions of dollars worth of assets plunging into the bad category as high interest rates strain borrowers.
The amount of real estate-challenged CRE assets forced to sell because owners can’t afford their mortgages rose 10% in the first quarter, according to a report by MSCI Real Assets cited by Bloomberg. to approximately $64 billion. Another $155 billion in assets are at risk of going bad, according to the paper.
CRE’s mortgage delinquency rate rose to 3% in the first three months of 2023, according to the Home Loan Bankers Association.
U.S. commercial property owners have struggled over the past year as the Federal Reserve’s sharp interest rate hikes to curb inflation have eroded their ability to repay their mortgages. At the same time, tight credit conditions and the trend of working from home are increasing pressure on the industry.
Following the turmoil in the banking sector in recent months, there are widespread fears that commercial real estate could be the next industry to suffer turmoil.
Chinese economic slowdown
While the U.S. economy faces domestic economic problems, it also faces external risks, primarily China’s slowing growth.
After years of lockdowns under the Chinese government’s strict zero-corona policy, economists had hoped for a strong recovery in Asia after reopening this year. But that is far from what actually happened.
As insider Lynette Lopez reports, China’s economy is in more trouble than anyone thought, with slowing trade, sluggish industrial production and mounting debt, and that’s the problem for Wall Street. It has become.
Watch Now: Top Insider Inc. Videos
Loading…
