MacroResearchBoard

A.I.: Over-Hyped, Or A Game Changer? – July 24, 2023

A just-published report examined the long-term economic and financial market implications of artificial intelligence (A.I.), following the increasingly widespread availability of generative tools.

Despite recent market hype, estimating the long-run impact of A.I. on prospective economic growth, productivity, corporate profits and capital markets entails considerable guesswork. History provides numerous examples of the impact of major technological breakthroughs and subsequent changes on economic growth and asset prices. These examples, along with a recognition of current capital market fundamentals, are useful in laying out a framework for assessing A.I.’s potential impacts over the next few decades.

The report concluded:

• On the margin, A.I. could boost U.S. real GDP and labor productivity growth by 0.5-1% per year as it scales up over the course of the next decade. However, this is contingent on the disruptive impacts of A.I. being effectively managed by a highly-polarized political system.
• Indeed, given the disruptive implications of A.I. in many sectors and communities, there may well be pressure to permit a higher level of overall U.S. inflation to ease the economic adjustment process.
• Higher real GDP growth implies higher, not lower, U.S. real interest rates because the demand for capital will rise in conjunction with higher expected returns on invested capital.
• Current elevated U.S. equity valuations and earnings will temper the benefits of A.I. to U.S. equity market returns over the next decade, which we expect to be subpar by historical standards.