AI-Driven Growth Masks Economy's Underlying Weakness

Federal Reserve Chair Kevin Warsh delivered his first Jackson Hole speech, highlighting the strengths of the US economy but also warning that inflation remains a pressing concern.

The economy is indeed strong on average, with unemployment at 4.1% and business investment growing at its fastest pace since 2021.

However, Warsh acknowledged that this growth is largely driven by a narrow sector: the buildout of artificial intelligence, which accounts for more than half of this year's investment growth.

The problem with relying on AI-driven growth is that it relies heavily on borrowed money, with Goldman Sachs estimating that roughly a third of hyperscaler capital spending will be debt-financed this year.

This means that productivity, rather than population or labor-force growth, becomes the central question of this expansion. Without stronger productivity, slower growth in the economy's productive capacity is inevitable.