5 reasons the AI boom might not be a buffer against a recession

Business Insider

2 days ago

The AI boom might not be enough to stave of an economic downturn.
That's according to Peter Berezin, the chief global strategist at BCA Research who thinks that the US still has a 60% chance of entering recession in the next 12 months.
A contraction, if it comes, likely won't be prevented by the craze for artificial intelligence, Berezin wrote in a note to clients on Monday, referring to chatter that AI can enhance productivity and spur enough growth in the economy to offset President Donald Trump's tariffs.
Investors saw a clear warning in the latest jobs data, Berezin suggested, with the US adding far fewer payrolls than expected in July. Job gains for May and June were also revised downward by a collective 258,000, which Berezin called the "coup de grâce" of the latest jobs report.
Stocks are still hovering near all-time highs, likely due to the belief that the weakness in the labor market stems from "temporary" pressures from Trump's tariffs, as well as enthusiasm for AI, Berezin speculated.
"Although we doubt that this is the full story, our guess is that stocks will anchor themselves on this benign explanation until proven otherwise," Berezin wrote, later adding that investors couldn't count on AI to "save" the economy.
"The AI boom is more of a stock market story than an economic story, at least so far," he continued.
Here are the reasons Berezin is skeptical AI will buffer the economy from a recession:
1. AI spending benefits will take time to trickle down.
Big tech firms have been spending big on AI. But the boom in capital expenditures is largely concentrated in Nvidia's AI chips and other tech equipment, which aren't manufactured in the US.
"Although it is possible that some of this spending will be restored back to the US, it will take a while for that to happen," Berezin wrote.
2. Tech job market in decline.
Tech employment is showing signs that growth in the sector is past its peak.
Employment in the IT Services sector was lower in July than it was at the end of 2024, according to BCA's analysis.
Private job gains in computer and electronic manufacturing is also hovering near a record-low.
3. Higher energy prices
The boom in data centers means the US will need a lot of energy that it currently doesn't have. That's raising electricity prices for consumers, a factor that's likely to weigh on consumer spending, Berezin said.
Wholesale electricity prices are up 22% from levels last year, according to data from PJM Interconnection.
Consumer spending — which accounts for around two-thirds of GDP — rose more than expected in June, but dropped 0.9% in May.
4. Productivity gains aren't here yet
There aren't many signs at the moment that AI is significantly boosting productivity.
Productivity growth in the "Post-ChatGPT" era, which spans the fourth-quarter of 2022 to now, has averaged around 2.1%, below the average during the peak of the dot-com bubble. Productivity growth is also about the same as it was over the past decade, BCA's analysis shows.
"Thus far, however, the data does not point to a structural acceleration in productivity," Berezin said.
It could take a long time to see productivity gains from AI effervesce. Productivity growth accelerated in the late 90s, but around 15 years after the personal computer was created, Berezin noted.
5. Other recession indicators are flashing warnings
Other indicators of potential downturn are showing signs that the economy could be past its business cycle peak.
Berezin pointed to the National Bureau of Economic Research's "Big Six" recession indicators, which could signal the economy is already starting to meaningfully contract.
Civilian employment, for instance, is down 0.5% since April, according to BCA's analysis of Federal Reserve data.
Real sales in manufacturing and trade and Real income minus current transfer receipts, two measures of consumer spending power in the US, have also slightly declined over the last several months, according to data the firm analyzed from the Bureau of Economic Analysis.
"We had planned to reduce our US recession odds if last week's data parade came in on the strong side. It did not, so we are keeping our 12-month recession probability of 60% as is," Berezin wrote, adding that he believed recession risks were "front-loaded" into 2025.
The risk of a downturn has become front-of-mind after the latest jobs data, though most forecasters on Wall Street still expect the economy to nail a soft-landing in 2025. Goldman Sachs, Bank of America, and JPMorgan are among those who have trimmed their recession odds in recent months, largely due to Trump dialing back some of the tariffs he announced on Liberation Day.