Moody's Analytics' Mark Zandi: Biggest risk to economy is correction in stocks focused on AI

Zandi delineated two primary channels through which the AI phenomenon is currently fueling economic expansion. Firstly, he underscored the "wealth effects generated by the surge in equity prices," explaining that this newfound affluence translates directly into increased consumer spending. The aggregate valuation of publicly traded stock has surged by an impressive $10-11 trillion over the past year. This substantial increase in wealth empowers individuals, particularly high-net-worth investors, to spend more, thereby injecting considerable momentum into the economy. This intuitive connection between perceived wealth and spending is a well-established economic principle, and its current manifestation is undeniably potent.

Beyond the direct impact on consumer behavior, Zandi pointed to the massive investment in AI infrastructure as another critical driver of growth. The sheer scale of capital expenditure dedicated to building and expanding data centers, for instance, is staggering. He cited a compelling statistic: the United States alone boasts approximately 5,500 data centers, overshadowing the 3,500 found across the rest of the world, including China. This unprecedented level of investment signifies a profound commitment to the AI revolution, creating jobs, stimulating manufacturing, and driving demand across various ancillary industries.

Zandi intricately linked these two drivers, suggesting that the investment surge itself is intrinsically tied to the performance of the equity market. He argued that such substantial capital deployment "wouldn't get this kind of investment unless stock prices were raging like they are," as robust valuations provide the necessary "currency and the license to go out and invest more." This symbiotic relationship means that any significant downturn in AI stock valuations could not only dampen consumer confidence but also curtail the very investment fueling the sector's rapid expansion.

The economist did not shy away from drawing parallels to historical market phenomena, specifically referencing the Y2K bubble. While cautiously stating that the current situation is "not Y2K-like yet," he acknowledged that it shares a similar "ballpark" in terms of valuation and market fervor. This historical context serves as a potent reminder of how quickly speculative bubbles can deflate, with potentially devastating consequences for the broader economy. The risk is not merely theoretical; it is a palpable concern for policymakers and investors alike.

A core insight from Zandi's commentary is the economy's profound dependence on the sustained momentum of the AI sector. "The economy is very, very dependent on the tailwind created by AI," he cautioned. Should this powerful "tailwind go soft," the economy would then face existing "headwinds" such as deglobalization, leading to a significant "problem." This suggests that the current growth, while impressive, might be masking underlying fragilities that could become exposed if the AI narrative falters.

Further exacerbating this precarious situation is the state of the labor market. Zandi expressed "a lot of angst" regarding employment figures, asserting that "the job market is flat on its back." He contends that the U.S. is already experiencing a "jobs recession," with minimal job creation occurring even before the full impact of AI on job displacement materializes. This assessment stands in stark contrast to the booming stock market and robust GDP figures, suggesting a disconnect between different economic indicators. The lack of reliable government data, due to recent disruptions, further complicates an accurate understanding of the labor market's true health.

Even with the impressive headline GDP growth figures, such as the Atlanta Fed's tracking estimate of 3.9% for Q4, Zandi urges caution. He notes his own model projects a more modest 2.8% and emphasizes the inherent unreliability of these estimates given the data gaps. More critically, he stressed the importance of looking beyond quarterly fluctuations to the underlying year-over-year growth rate. Despite the strong performance in Q2 and Q3, factoring in a negative Q1, the overall economic growth remains in the 1.5-2% range. This underlying growth, even with the AI boom, is "below the economy's potential," indicating that while AI is providing a significant boost, it has not fundamentally altered the long-term growth trajectory to a degree that would insulate the economy from a significant shock. The cumulative effect of a weak underlying job market and an economy highly susceptible to a correction in an overvalued tech sector paints a picture of substantial risk for the coming quarters.