- Michael Arone said the US economy will avoid a recession thanks to AI, immigration and high-income consumers.
- State Street investment strategists said AI will boost productivity and immigration will keep inflation in check.
- “The economy is moving to a new rhythm, so the Fed's tightening policy this time around is not going to stop the music,” Arrone said.
Thanks to artificial intelligence, immigration, and the wealthy, the US economy will continue to grow and ultimately avoid a recession.
That's according to Michael Arone, chief investment strategist at State Street, who wrote in a recent note that even if the Federal Reserve keeps monetary policy in restrictive territory through high interest rates, that probably won't be enough to send the economy into a tailspin.
“There is a growing risk that an intransigent Fed could gradually and suddenly tip the economy into recession,” he said. “But for these three reasons, the economy may just narrowly escape a horrible recessionary outcome.”
“Artificial intelligence is real”
While AI technology is still in its early stages, it has great potential to improve economic productivity, increase corporate profits and drive greater business growth, Arone said.
“Recent studies claim that AI can increase productivity across a wide range of jobs by 20 to 80 percent, which compares favorably with another general-purpose technology: steam power,” he said.
Arrone points out that steam power sparked the Industrial Revolution, but when that technology was introduced into factories, it only increased productivity by 18 to 22 percent.
If AI can increase productivity many times over, that could lead to huge economic benefits in the future that should outweigh any policy mistakes by the Fed, Arone said.
“Immigration brings incredible economic benefits”
Americans can thank immigrants for continued progress in fighting inflation, Arrone said.
“Many people underestimate the role that increased immigration has played in stabilizing the labor market in the wake of the pandemic without adding further inflationary pressures,” he said.
Wage inflation spiked early in the pandemic, with overall inflation hitting a cycle peak of 9.1% in June 2022. But an influx of more than 1.5 million immigrants in 2023 will help balance supply and demand in the labor market, Arrone said.
“The pace of immigration growth over the past few years has been consistent with past economic expansions, and job openings remain high in immigrant-dependent service industries, so participation rates are likely to rise over the next two years, further strengthening the labor market,” he said.
Arone also noted that increased immigration could have mixed effects on the U.S. economy in the long term: While immigrant workers typically enter the country in low-skill service jobs, some also become entrepreneurs, stimulating innovation, consumption and fiscal contributions.
“Luxury consumers are on a roll”
Despite concerns about rising delinquency rates and more than $1 trillion in credit card debt, Arone said upper-income Americans are in good financial health.
This is important, he says, because people making more than $150,000 account for 40% of U.S. consumer spending.
“They hold 85% of stocks, 80% of bonds and two-thirds of liquid assets. But they only account for about one-third of consumer credit card balances,” Arone said, citing data from Empirical Research Partners.
Wages for this age group are expected to rise 5 percent this year and spending is expected to increase 8 percent this year, but spending could rise further if inflation continues to fall and stock and home prices continue to rise, Arone said.
“Unlike previous periods, rising stock and home prices, combined with strong growth in interest income, have allowed high-income earners to continue spending robustly through cycles of tight monetary policy,” he said.
Putting all this together, Arone believes the U.S. economy is on a solid growth trajectory for the next few quarters, which should ultimately help the economy avoid a recession and allow the stock market to continue to rise.
“The economy is moving to a new rhythm, so the Fed's tightening policy this time around is not going to stop the music,” he said.
