Here's a statement of the obvious: The opinions expressed here are those of the participants, not those of the Mutual Fund Observer. We cannot vouch for the accuracy or appropriateness of any of it, though we do encourage civility and good humor.
"The U.S. economy is in transition, facing structural shifts that will alter how policymakers and investors think about employment, inflation, and economic growth in the years to come. These shifts—in particular the more widespread adoption of artificial intelligence—require new ways of analyzing data and testing the relationships among economic indicators, says Michael Reid, head of U.S. economic research at Royal Bank of Canada."
This week's Barron's offers interesting opposite views. Barron's critics who think that it has only one view should take note.
Michael REID argues that AI productivity bonus won't be there soon. He thinks that the US economy will be bogged down due to labor constraints and lower consumer spending (67% of US GDP).
Another piece focuses on Kevin WARSH's view that AI productivity gains will overcome some of the current economic ills such as high sticky inflation - well, that's what got him the job. It further notes that WARSH is really a hawk who has adopted this AI growth solution for inflation dilemma that may or may not sway the hawkish Fed he will be join.
Only one of these views will be correct and we will know that fairly soon.
Q&A. Michael REID, RBC (Canada) (formerly, Oxford Economics and BEA). 2026 may see sticky inflation and low job growth, but no AI productivity gains. Instead of economic models, he looks at raw data to discover trends. He prefers economic data over surveys. He doesn’t buy into the optimistic theory that growth will cure all economic ills. US K-shaped economy will have headwinds as the saving rates for wealthy are declining and household debt delinquencies are rising (so, both legs of K will cause weakness in spending). Unless the labor market weakens significantly, he doesn’t see any Fed cuts in 2026, maybe so in 2027.
US labor pool is shrinking because retirees aren’t being replaced and supply from immigration has dried up. RBC is shifting its focus from economic sectors to occupational categories for which better government data are available. BLS revisions have to be interpreted carefully as those may change conclusions. AI is causing high growth in new data-sciences occupational category. Healthcare and social services will continue to have strong growth. In some areas, older people can continue to work and that is slowing job growth. Younger people are having hard time finding jobs because of skills mismatch. Many common or popular college majors have poor job prospects. There are also geographical mismatches with high-cost areas not having viability in supporting basic jobs. Inflation looks tame now only because of falling used-car prices; prices in most other categories are rising.
ECONOMY. Fed Chair nominee Kevin WARSH wants to cut interest rates but the Fed he would join is hawkish overall (7 Fed Governors + 5 Fed Bank Presidents). Economic data remains strong and may not justify cuts. Inflation is sticky at +3%. Warsh will make the growth argument that AI capex will increase productivity and reduce inflation – maybe. In the current Fed structure, authority of Fed Chair is limited – I vote and the power of personal persuasion. (Interestingly, CME FedWatch is showing “hold” at 6/17/26 FOMC, likely the 1st FOMC under Warsh) Senate hasn’t moved on Warsh’s confirmation but there is still plenty of time (remember that Senate confirmed Fed Governor MIRAN within a week of his nomination when that process typically takes weeks/months). POWELL could also hang around until his term as Fed Governor ends in 01/2028.
Comments
Michael REID argues that AI productivity bonus won't be there soon. He thinks that the US economy will be bogged down due to labor constraints and lower consumer spending (67% of US GDP).
Another piece focuses on Kevin WARSH's view that AI productivity gains will overcome some of the current economic ills such as high sticky inflation - well, that's what got him the job. It further notes that WARSH is really a hawk who has adopted this AI growth solution for inflation dilemma that may or may not sway the hawkish Fed he will be join.
Only one of these views will be correct and we will know that fairly soon.
For the convenience of MFO readers, I am including relevant portions from my weekend summaries,
https://ybbpersonalfinance.proboards.com/thread/1010/weekly-business-digest-february-2026
Q&A. Michael REID, RBC (Canada) (formerly, Oxford Economics and BEA). 2026 may see sticky inflation and low job growth, but no AI productivity gains. Instead of economic models, he looks at raw data to discover trends. He prefers economic data over surveys. He doesn’t buy into the optimistic theory that growth will cure all economic ills. US K-shaped economy will have headwinds as the saving rates for wealthy are declining and household debt delinquencies are rising (so, both legs of K will cause weakness in spending). Unless the labor market weakens significantly, he doesn’t see any Fed cuts in 2026, maybe so in 2027.
US labor pool is shrinking because retirees aren’t being replaced and supply from immigration has dried up. RBC is shifting its focus from economic sectors to occupational categories for which better government data are available. BLS revisions have to be interpreted carefully as those may change conclusions. AI is causing high growth in new data-sciences occupational category. Healthcare and social services will continue to have strong growth. In some areas, older people can continue to work and that is slowing job growth. Younger people are having hard time finding jobs because of skills mismatch. Many common or popular college majors have poor job prospects. There are also geographical mismatches with high-cost areas not having viability in supporting basic jobs. Inflation looks tame now only because of falling used-car prices; prices in most other categories are rising.
ECONOMY. Fed Chair nominee Kevin WARSH wants to cut interest rates but the Fed he would join is hawkish overall (7 Fed Governors + 5 Fed Bank Presidents). Economic data remains strong and may not justify cuts. Inflation is sticky at +3%. Warsh will make the growth argument that AI capex will increase productivity and reduce inflation – maybe. In the current Fed structure, authority of Fed Chair is limited – I vote and the power of personal persuasion. (Interestingly, CME FedWatch is showing “hold” at 6/17/26 FOMC, likely the 1st FOMC under Warsh) Senate hasn’t moved on Warsh’s confirmation but there is still plenty of time (remember that Senate confirmed Fed Governor MIRAN within a week of his nomination when that process typically takes weeks/months). POWELL could also hang around until his term as Fed Governor ends in 01/2028.