{"id":208058,"date":"2025-10-12T14:56:09","date_gmt":"2025-10-12T14:56:09","guid":{"rendered":"https:\/\/www.newsbeep.com\/au\/208058\/"},"modified":"2025-10-12T14:56:09","modified_gmt":"2025-10-12T14:56:09","slug":"americas-future-could-hinge-on-whether-ai-slightly-disappoints","status":"publish","type":"post","link":"https:\/\/www.newsbeep.com\/au\/208058\/","title":{"rendered":"America’s future could hinge on whether AI slightly disappoints"},"content":{"rendered":"

A burning question that\u2019s on a lot of people\u2019s minds right now is: Why is the U.S. economy still holding up? The manufacturing industry is hurting badly<\/a> from Trump\u2019s tariffs, the payroll numbers are looking weak<\/a>, and consumer sentiment is at Great Recession levels:<\/p>\n

\"\"<\/a><\/p>\n

And yet despite those warning signs, there has been nothing even remotely resembling an economic crash yet. Unemployment<\/a> is rising a little bit but still extremely low, while the prime-age employment rate<\/a> \u2014 my favorite single indicator of the health of the labor market \u2014 is still near all-time highs. The New York Fed\u2019s GDP nowcast thinks that GDP growth is currently running at a little over 2%<\/a>, while the Atlanta Fed\u2019s nowcast puts it even higher<\/a>. <\/p>\n

One possibility is that everything is just fine with the economy \u2014 that Trump\u2019s tariffs aren\u2019t actually that high because of all the exemptions, and\/or that economists are exaggerating the negative effects of tariffs in the first place. Weak consumer confidence could be a partisan \u201cvibecession\u201d, payroll slowdown could be from illegal immigrants being deported or leaving en masse, and manufacturing\u2019s woes could be from some other sector-specific factor. <\/p>\n

Another possibility is that tariffs are bad, but are being canceled out by an even more powerful force \u2014 the AI boom. The FT reports<\/a>:<\/p>\n

Pantheon Macroeconomics estimates that US GDP would have grown at a mere 0.6 per cent annualised rate in the first half were it not for AI-related spending, or half the actual rate.<\/p>\n

Paul Kedrosky came up with similar numbers<\/a>. Jason Furman does a slightly different calculation<\/a>, and arrives at an even starker number:<\/p>\n

\"\"<\/a><\/p>\n

And here\u2019s an impressive chart:<\/p>\n

The Economist writes<\/a>:<\/p>\n

[L]ook beyond AI and much of the economy appears sluggish. Real consumption has flatlined since December. Jobs growth is weak. Housebuilding has slumped, as has business investment in non-AI parts of the economy[.]<\/p>\n

And in a post entitled \u201cAmerica is now one big bet on AI<\/a>\u201d, Ruchir Sharma writes that \u201cAI companies have accounted for 80 per cent of the gains in US stocks so far in 2025.\u201d In fact, more than a fifth of the entire S&P 500 market cap is now just three companies<\/a> \u2014 Nvidia, Microsoft, and Apple \u2014 two of which are basically big bets on AI. <\/p>\n

Now as Furman points out<\/a>, this doesn\u2019t necessarily mean that without AI, the U.S. economy would be stalling out. If the economy wasn\u2019t pouring resources into AI, it might be pouring them into something else, spurring growth that was almost as fast as what we actually saw. But it\u2019s also possible that without AI, America would be crashing from tariffs.<\/p>\n

Trump certainly seems to think AI is a golden goose worth protecting. Joey Politano points out<\/a> that even as Trump has slapped tariffs on a plethora of industries, he has left AI and its supply chain mostly untouched:<\/p>\n

But despite Trump\u2019s tariff exemptions, the AI sector could very well crash in the next year or two. And if it does, it could do a lot more than just hurt Americans\u2019 employment prospects and stock portfolios.<\/p>\n

If AI is really the only thing protecting America from the scourge of Trump\u2019s tariffs, then a bust in the sector could change the country\u2019s entire political economy. A crash and recession would immediately flip the narrative on Trump\u2019s whole presidency, much as the housing crash of 2008 cemented George W. Bush\u2019s legacy as a failure. And because Trump\u2019s second term is looking so transformative, the fate of the AI sector could potentially determine the entire fate of the country. <\/p>\n

So a whole lot is riding on the question of whether an AI bust will crash the economy. The stakes could hardly be higher. <\/p>\n

A lot of bubbles are purely financial beasts, driven by irrationality or coordination problems in the markets for stocks, bonds, and derivatives. For example, you can have a speculative bubble<\/a>, in which a bunch of people know an asset is overpriced, but think they can sell out before the crash, and so they keep buying and buying and pushing the price up and up. You can also have an extrapolative bubble<\/a>, when people see the price of something going up and up, and mistakenly decide that it must be due to some underlying positive trend.<\/p>\n

But a much simpler possibility is that investors could make a big mistake about how valuable some technology is. They could honestly believe that AI is going to create immense amounts of value, and they could just end up being wrong. Then when they realize that the technology isn\u2019t all it\u2019s cracked up to be, they could temper their expectations, which would cause a price crash in AI stocks. But the stock crash wouldn\u2019t be the real problem; far more painful would be the wave of loan defaults and financial distress that would result from AI\u2019s actual shortcomings. <\/p>\n

If there\u2019s an AI crash, it\u2019ll probably be this latter type. Jeff Bezos calls it an \u201cindustrial bubble\u201d<\/a>, and I think that\u2019s as good a name as any. This kind of bubble is still a financial phenomenon, since the banking system gets hurt. But the cause is a mistake about real technology, rather than asset markets going haywire. <\/p>\n

Everyone who\u2019s talking about an AI bubble is basically warning that the technology itself might disappoint. For example, here are some excerpts from a big Bloomberg feature<\/a> about the possibility of an AI bubble:<\/p>\n

Even some of AI\u2019s biggest cheerleaders acknowledge the market is frothy, while still professing their belief in the technology\u2019s long-term potential. AI, they say, is poised to reshape multiple industries, cure diseases and generally accelerate human progress\u2026Yet never before has so much money been spent so rapidly on a technology that, for all its potential, remains somewhat unproven as a profit-making business model\u2026<\/p>\n

The data center spending spree is overshadowed by persistent skepticism about the payoff from AI technology. In August, investors were rattled after researchers at the Massachusetts Institute of Technology found that 95% of organizations<\/a> saw zero return on their investment in AI initiatives.<\/p>\n

More recently, researchers at Harvard and Stanford offered a possible explanation for why. Employees are using AI to create \u201cworkslop<\/a>,\u201d which the researchers define as \u201cAI generated work content that masquerades as good work, but lacks the substance to meaningfully advance a given task.\u201d\u2026<\/p>\n

AI developers have also been confronting a different challenge. OpenAI\u2026Anthropic and others have for years bet on the so-called scaling laws\u2026Over the past year, however, these developers have experienced diminishing returns<\/a>\u2026Some have also struggled to match their own hype. After months of touting GPT-5 as a significant leap, OpenAI\u2019s release of its latest AI model in August was met with mixed reviews\u2026<\/p>\n

There\u2019s also the risk that the AI industry\u2019s vast data center buildout, entailing a huge increase in electricity consumption<\/a>, will be held back by the realities of strained national power networks.<\/p>\n

When you bring up concerns like this to an AI engineer, executive, or founder, they tend to just smile at you indulgently, secure in the knowledge that their invention is everything it\u2019s cracked up to be, and that much better things are already in the pipeline. <\/p>\n

But this doesn\u2019t reassure me. Because when we look at the history of industrial bubbles, and of new technologies in general, it becomes clear that in order to cause a crash, AI doesn\u2019t have to fail. It just has to mildly disappoint the most ardent optimists.<\/p>\n

This is why I think an AI crash is more likely than a lot of people in the tech world \u2014 or the Trump administration \u2014 realize.<\/p>\n","protected":false},"excerpt":{"rendered":"A burning question that\u2019s on a lot of people\u2019s minds right now is: Why is the U.S. economy…\n","protected":false},"author":2,"featured_media":208059,"comment_status":"","ping_status":"","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[20],"tags":[256,254,255,64,63,105],"class_list":{"0":"post-208058","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-artificial-intelligence","8":"tag-ai","9":"tag-artificial-intelligence","10":"tag-artificialintelligence","11":"tag-au","12":"tag-australia","13":"tag-technology"},"_links":{"self":[{"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/posts\/208058","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/comments?post=208058"}],"version-history":[{"count":0,"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/posts\/208058\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/media\/208059"}],"wp:attachment":[{"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/media?parent=208058"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/categories?post=208058"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/tags?post=208058"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}