Authored by Simon White, Bloomberg macro strategist,
The AI boom is helping drive a US and global cyclical upturn in growth which, in concert with the US’s large fiscal deficit, has been keeping the economy from slipping into recession.
“Cutting-edge technology” and “government” are not often associated with one another, given the latter’s reputation for being slow to adopt the former.
But in this cycle they have uncoordinatedly worked together to keep a recession that had looked all but certain last year at bay.
One hitherto reliable early indicator of recessions is the performance of highly-cyclical stock sectors.
Stanley Druckenmiller has referred to the inside of the stock market as “the best economist I know.”
An indicator based on his insight has been in a steady decline since early 2023, and over the last six months has been flirting with levels that would normally signal a recession is imminent.
Yet we have had no NBER recession, and are not likely to get one at least through the first half of the year.
The chart below shows what happened.
When traditional cyclical sectors, such as banks, autos and small caps, started to turn down, AI stocks bottomed and began to rally. This was at the same time as OpenAI released the revolutionary ChatGPT 3.5.
It’s not just the market the AI sunrise has galvanized, but the real economy too.
It has fueled a renewed demand for semiconductors. The industry faced a tough time in 2022 as demand suffered, but that began to pick up in 2023. Inventories continued to rise but they now look like they are peaking.
Semis stocks are one of the most highly-cyclical leading indicators of US and global growth.
They have been surging as it is believed demand will be strong enough to exceed inventories. Demand is anticipated from generative AI especially – Meta announced Thursday it will have almost one million N100 chips or near-equivalents by the end of the year – but also from laptops, smartphones and cars.
As the chart below shows, the rise in semis stocks points to US manufacturing – itself a cyclical indicator of broader growth – soon turning up.
It’s unlikely the AI surge would have been enough on its own to defer the recession. The government’s decision to run an 8-9% fiscal deficit, however, sealed the deal.
[ZH: Which helps explain this decoupling…]
The Treasury Put, the government’s willingness to run large pro-cyclical fiscal deficits…
…has been the main reason why the unemployment rate has stayed low and not risen into recession territory, despite the fastest Fed interest rate-hiking cycle for four decades.