From: allin
The economic outlook and recession predictions remain a significant point of discussion, with experts weighing in on the likelihood of a downturn and the appropriate policy responses.
The Current Economic Climate
There is a prevalent belief that the U.S. economy is currently in a recessionary stance [01:27:28]. This perspective suggests that while inflation may be diminishing, purchasing power is shrinking even faster, making it feel like prices are still rising for many individuals [01:29:29]. While nominal terms and data like Q2 GDP (around 2% growth) do not officially indicate a recession [01:36:12], there are concerns that economic data has consistently been reforecast downwards [01:36:31]. For example, Q1 GDP was initially reported at 1.8% but later restated to 1.3% [01:36:51].
A major underlying problem is massive government spending, with the deficit running at 6% of GDP while economic growth is charitably at 2% [01:37:04]. If the budget were balanced, GDP growth would be negative 4% [01:37:20], indicating that current positive growth is unsustainable and propped up by federal spending [01:37:32]. Federal government spending, projected at $7.3 trillion next year, accounts for about 30% of GDP [01:38:11]. Furthermore, it’s estimated that close to 30% of U.S. employment is either direct or indirect government employment [01:38:24], with some reports suggesting that government jobs account for over 100% of job creation in the past year, implying a net loss in private market jobs [01:40:41]. This dependency on government spending creates a fundamental issue in the economy’s structure [01:39:03].
Industries like agriculture, food, and industrial sectors are struggling with orders falling off a cliff, massive oversupply, and under-purchasing [01:39:23]. Many businesses are pushing up prices to meet debt payments on high-interest debt, leading to a “haves and have-nots” scenario where some high-margin businesses can scale, while others are crippled by interest rate changes [01:39:42].
Federal Reserve Policy and Rate Cuts
At a recent policy meeting, the Fed held interest rates steady [01:33:19]. Jerome Powell indicated that a reduction in the policy rate “could be on the table in September if inflation continues to fall” [01:33:22]. He noted that the Fed is “getting closer to the point at which it’ll be appropriate to reduce our policy rate but we’re not quite at that point” [01:33:28].
The market is currently estimating an 80% probability of a 25 basis point rate cut and a 20% probability of a 50 basis point cut at the September 17th-18th meeting [01:33:43]. While the Fed is expected to cut rates, some believe a 25 basis point cut will likely occur, with a 50 basis point cut being a possibility if they are truly getting to him [01:35:25]. However, it’s believed that such a cut alone won’t solve the broader economic problems [01:35:31].
Market Performance and Industry Disparities
Following the Fed’s rate cut indications, markets saw a slight rally [01:41:00]. However, this has been characterized by “halves and have-nots” [01:41:08]. While some companies like AMD, Microsoft, and Nvidia reported strong results due to increased AI chip sales and demand [01:41:14], these rallies often lead to sell-offs as investors book profits, indicating a “sell the news” dynamic and potentially the tail end of the AI hype cycle [01:42:00].
The Role of AI in the Economy
AI is described as “massively deflationary” [01:44:42]. It allows for significant efficiency capture and cost savings with relatively little money [01:44:46]. Startups utilizing AI can pass these savings onto customers, enabling differential pricing against incumbent solutions [01:44:59]. While AI-enabled companies could achieve 70-80% margins in the next 15-20 years, they will likely operate in smaller markets with thousands of such companies [01:44:55]. This could lead to overall market growth but with an even larger increase in the number of companies, making it difficult for larger entities to capture value from their investments [01:45:25]. This suggests a potential “reset in terms of the capex” that has occurred in AI [01:45:43].