AI is keeping the US economy out of a recession

The US economy has continued to defy expectations of a slowdown, with artificial intelligence playing a significant role in keeping growth steady despite various challenges. According to BNP Paribas chief US economist James Egelhof, AI has been instrumental in preventing a recession.

AI-driven investment has offset the impact of higher rates, leading to a surge in data center and chip spending that has contributed to ongoing growth. Bank of America Research has estimated that AI-related capital expenditures added 1.3 percentage points to second-quarter GDP growth. Additionally, small businesses are increasingly investing in tech services, with payments jumping nearly 7% year over year in September.

The ripple effects of AI are evident beyond the technology sector. Soaring stock prices have fueled high-end spending, while increased business confidence has encouraged companies to continue hiring and investing. Egelhof believes that the AI boom has instilled confidence in the business community, leading to expectations of a robust expansion and productivity surge in the near future.

The Federal Reserve has been able to ease monetary policy despite inflation exceeding target levels, thanks to the strength of the economy driven by AI productivity gains. However, the AI boom has also reshaped aspects of the financial system. Apollo chief economist Torsten Sløk notes that the transmission mechanism for monetary policy has been “broken” by AI, as higher rates typically slow corporate spending but have not had the same effect due to financing through equity valuations rather than debt.

Hyperscalers like Microsoft, Meta, Alphabet, and Amazon now account for more than a quarter of all S&P 500 capital expenditures, growing at a rapid pace. Office construction has declined since the Fed began raising rates in 2022, while data center projects have surged, fueled by equity gains in the tech sector.

As Sløk emphasizes, broader financial conditions, not just the fed funds rate, are key factors influencing capital expenditure decisions. The AI boom has fundamentally altered the relationship between monetary policy and corporate spending, highlighting the evolving nature of the economy in the digital age.