US economy is facing serious threats veiled by AI craze

Since the sensational debut of ChatGPT, the hype of investors over artificial intelligence has never been cooled, so is the valuation of tech stocks. However under this blossom, are some pale realities faced by US economy, in stark contrast with bullish market.

 

High interest rates 

The Fed has raised interest rates by 500bps over last 15 months to fight against a 40-year-high inflation, brought US benchmark rates to the highest level since 2007, right before the financial crisis. The tightening policy has successfully brought the annual pace of CPI increases has fallen  down to 4% from last year's peak of 9.1%, but still remains twice the central bank's 2% target. And although the Fed held the rates still this month, it still implied two more 25bps hikes by the end of this year.

 

To market experts, this could aggravate the risk of economic downturn, since higher borrowing costs have already hurt interest-rate sensitive sectors of the US economy, such as banking industry. And some investors are worried US stocks are the next to suffer if the Fed continues rate-hiking. This has prompted short sellers to bet over $1 trillion against US stocks, despite the current bull market.

 

Recession risk

Given the perspective of higher rates and sticky inflation, several economists and markets veterans have warned a looming US recession. Even according to the Fed’s own recession model, there's a 70% chance the US economy will experience an economic downturn by May 2024.

 

That could even put a dent in the AI hype, according to OANDA senior market analyst Kelvin Wong.

 

"Overall, a higher for longer interest-rates environment is likely to further increase the costs of funding coupled with an impending global recession that may put downside pressure on corporates' profit margins," he said in a daily newsletter.

 

"Given all other things being equal, such a scenario will likely trim corporates' budgets and demand for technology hardware and software upgrades that could put a dampening effect on the current bout of AI optimism," Wong added.

 

Commercial real-estate troubles

Under the mounting pressure of high interest rates, tens of billions of dollars worth of assets are slipping towards distress, especially commercial real estates. Steep interest-rate increases by the Fed has been chipping away borrowers’ ability to pay the mortgage, and tightening credit conditions and work-from-home trends are adding pressure on the industry.

 

According to an MSCI Real Assets report, the amount of CRE assets which are  forced to be sold as owners can't afford to pay their mortgages, jumped by 10% in the first quarter to about $64 billion. Besides, another $155 billion of assets may be at risk of turning bad, according to Bloomberg.

 

CRE mortgage delinquencies rose to 3% in the first three months of 2023, according to the Mortgage Bankers Association.