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How will we know AI is delivering?
December 10, 2024
Welcome to Uncommon Truths, Paul Jackson and Andras Vig’s regular in-depth look at the big topics impacting markets.
As is usual when new technologies arrive, the benefits of AI have so far accrued largely to the enablers (model builders, data providers and semi-conductor manufacturers). Paul believes that at some stage we should see broader economic benefits (if this truly is a revolutionary technology).
Paul suggests that if AI does anything, it should boost productivity. However, productivity is cyclical, so it will be difficult to separate the underlying wheat from the cyclical chaff and we may not be aware of the gains until well after the fact. Paul believes that other effects would be disappointing job growth (jobless recoveries, say), lower inflation and wider profit margins. The period after the mid-1990s (technology boom) showed rising productivity growth and falling inflation and this sort of wedge in the future could be a sign that AI is working.
As for financial markets, the effect on bond yields could be mixed (higher growth could raise real yields, but lower inflation could reduce inflation breakevens). Paul suspects they may rise a bit. Equities should benefit from wider margins but the effect could be dampened if real bond yields rise. Finally, as the benefits of AI spread to users (rather than enablers), Paul expects the extreme concentration in US stock indices to wane.
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