Technology-Driven Growth Outpaces Inflation Amidst Fed Policy Pause - Episode Hero Image

Technology-Driven Growth Outpaces Inflation Amidst Fed Policy Pause

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TL;DR

  • US potential growth could increase from 1.8% to 4% by 2030, driven by a technology-driven supply shock encompassing AI and 14 other future technologies, not just AI alone.
  • Real revenue per worker for S&P 500 firms has increased by 15% since November 2022, indicating a productivity revolution already impacting corporate profitability despite slower real wage growth.
  • Geopolitical risks, while present, have had limited market effects in recent decades, suggesting that technology-driven growth is a first-order economic factor, while geopolitics is second-order.
  • The Federal Reserve is likely to pause interest rate cuts as they approach neutral policy, focusing on parsing confusing economic data and assessing the impact of fiscal stimulus and tariff pass-through.
  • The US faces a trade-off where technology offers a potential 200 basis point upside to growth, while speculative policies like trade restrictions could impose a 50 basis point downside.
  • The current economic environment shows a wealth effect driving elevated domestic demand and resilient consumption, even with slower real labor income growth, indicating underlying inflationary pressures.

Deep Dive

The U.S. economy is experiencing a dual dynamic of accelerating productivity, driven significantly by AI, alongside persistent inflation pressures stemming from a wealth effect and potential tariff pass-throughs. This outlook suggests that while technological advancements promise higher long-term growth, immediate economic policy must navigate the complexities of managing demand and supply-side impacts to achieve price stability.

The core of the optimistic economic narrative centers on a technology-driven positive supply shock, primarily from AI and related innovations. Nouriel Roubini estimates that potential U.S. growth could rise from 1.8% to 4% by the end of the decade, supported by productivity gains that have doubled since 2019. This is evidenced by a 15% increase in real revenue per worker for S&P 500 firms since late 2022, indicating that companies are leveraging technology to boost output. This productivity boom is seen as a primary driver of potential growth, overshadowing concerns about geopolitical risks or protectionist policies, which Roubini posits have had minimal market impact in recent decades. The rationale is that the upside from technology is substantial, while the downside from trade restrictions is limited, creating an asymmetric favorable environment for U.S. growth.

However, this optimistic outlook is tempered by ongoing inflation concerns. Tiffany Wilding of PIMCO notes that recent economic data presents a "confusing number" due to mixed signals from goods and services sectors, further complicated by government-related distortions. The primary driver of persistent demand and potential inflationary pressures appears to be a wealth effect, where elevated asset values are supporting consumption growth even when real labor income growth is slower. Additionally, the anticipation of tariff pass-throughs and a significant tax refund season are expected to contribute to inflation, particularly in the early part of the year. While housing rents are projected to moderate, core goods prices are expected to remain elevated due to these factors, peaking in the first half of the year before moderating.

The intersection of these forces has implications for monetary policy. The Federal Reserve, having implemented significant rate cuts, is considered closer to a neutral policy stance. With a stable labor market and moderating inflation in some areas, the Fed is likely to pause its rate cuts to assess incoming data. The conversation is expected to shift towards defining the neutral interest rate and understanding underlying inflation trends post-tariff adjustments. This suggests a data-dependent approach, where the Fed will monitor the interplay between technological growth, demand-side pressures, and supply-side shocks in shaping its policy decisions. The implication is that while the U.S. economy has strong growth potential fueled by technology, the path to sustained price stability will require careful navigation of these complex and sometimes conflicting economic forces.

Action Items

  • Analyze US productivity data: Quantify AI's impact on real revenue per worker for S&P 500 firms (ref: Roubini Macro Associates).
  • Track 3-5 key technology sectors: Measure potential growth contribution (e.g., AI, quantum, fintech) to US GDP by 2030 (ref: Roubini Macro Associates).
  • Evaluate tariff impact: Assess potential pass-through effects on core goods inflation in early 2026 (ref: PIMCO).
  • Measure wealth effect: Correlate consumption growth with real labor income growth to understand demand drivers (ref: PIMCO).
  • Audit Fed communication: Analyze 3-5 recent statements for shifts in neutral rate policy discussion (ref: PIMCO).

Related Episodes

Key Quotes

"The Secretary isn't happy. He let the President know. This is something that people keep talking about. His concern was that it was going to roil markets, it would be counterproductive, and then it would actually make it more difficult for them to nominate someone who would be more Trump-friendly to the Federal Reserve, which seems to be exactly what is happening."

This quote highlights Treasury Secretary Scott Besson's dissatisfaction with a particular action, as reported by Axios. The Secretary's concern was that the action would negatively impact markets and hinder the appointment of a Federal Reserve nominee more aligned with Trump's policies. This suggests a strategic political calculation behind the Secretary's unhappiness.

"Look, the substance of the question here is whether or not the chair of the Federal Reserve lied before Congress. And what I would tell you is, having experienced multiple dozens of testimonies by various Fed chairs, the Fed chair coming to Congress is the most briefed person that appears before Congress, period. The briefing book is really the question here, not the Fed chair. Was the briefing book appropriately written to answer members of Congress' questions about the building project? I believe it was. And the amount of discipline the Fed puts into ensuring they have an accurate briefing book for the Fed chair, for any Fed chair. And I think that's the missing nuance of this story."

Patrick McHenry argues that the focus should be on the accuracy of the Federal Reserve chair's briefing book rather than the chair's personal testimony. McHenry, drawing on his experience with Fed testimonies, emphasizes the extensive preparation and discipline involved in creating these briefing materials. He suggests that any perceived inaccuracies likely stem from the briefing book itself, not a deliberate falsehood by the Fed chair.

"The Fed chair puts an enormous amount of time each week into ensuring his relationships around Washington D.C. I'm the beneficiary of that with the last four Fed chairs in my service in Congress. And it means that if there's a jump ball, you give them the benefit of the doubt because you have a relationship with them and you know them. That's the goal. It doesn't always work. The outreach doesn't always work. It doesn't mean you have a good relationship, but at the very least, the Fed chair and all Fed chairs have put a lot of effort into ensuring they have relationships on the Hill, that they have political capital in the bank so that when times get sideways or bad, they will defend you or be helpful to you."

Patrick McHenry explains the strategic importance of the Federal Reserve chair cultivating relationships with members of Congress. McHenry notes that this effort builds political capital, which can be crucial during challenging times. He suggests that these established relationships are intended to foster trust and provide support when needed, though he acknowledges that this outreach is not always successful.

"Well, it's a term of office, number one. And number two, a tradition that former chairs roll off the Fed board. It's a good practice for former Fed chairs to roll off the board. It allows their successor the time and runway to get up to speed. But in this case, these are, I would say at this phase, threats to counterbalance the President and the Department of Justice's threats here. And that shows that J. Powell's not powerless in the situation. The Federal Reserve is not powerless in the situation. That's one element of it. The other element of it is that it is clearly saying to the White House, 'Think of your nominees. Think of your nominees that have to go before Capitol Hill in this context.'"

Patrick McHenry discusses the implications of a former Fed chair potentially staying on the board beyond tradition. McHenry frames this as a strategic move to counter threats from the President and the Department of Justice, indicating that Fed Chair J. Powell and the Federal Reserve are not without influence. He suggests this action serves as a warning to the White House regarding future nominees facing congressional scrutiny.

"The US remains at the center of a technology-driven positive supply shock. The race is growth and lowers inflation over time."

Nouriel Roubini posits that the United States is currently experiencing a beneficial economic event driven by technology. Roubini believes this "positive supply shock" will lead to increased economic growth and reduced inflation in the future. This perspective frames technological advancement as a key driver of positive macroeconomic outcomes.

"So you have an upside of 200 from technology, you have a downside of 50. It's a ratio of 4 to 1. So tech trumps tariffs. So the stuff that is technology is first order. Everything else, including geopolitics, is second order."

Nouriel Roubini asserts that the potential economic benefits from technology significantly outweigh the negative impacts of trade restrictions like tariffs. Roubini quantifies this by stating a 4-to-1 ratio, emphasizing that technological advancements are the primary economic driver. He categorizes technology as a "first-order" concern, while geopolitics is considered "second-order" in its economic influence.

"You know, we're tracking consumption growth in the second half of the year, you know, 2.5% when, and that's at a time when you have real labor, real labor income growth at 1%. So you're clearly getting a wealth effect here that's keeping demand elevated. You know, so that appears to be the source of demand and some potential inflationary pressures."

Tiffany Wilding explains that elevated consumer demand is being driven by a "wealth effect," where consumption growth outpaces real labor income growth. Wilding notes that consumption grew by 2.5% while real labor income grew by 1%, indicating that consumers are spending more than their earnings might suggest. This wealth effect is identified as a source of demand that could contribute to inflationary pressures.

Resources

External Resources

Books

  • "The Brief Wondrous Life of Oscar Wao" by Junot Díaz - Mentioned in relation to the concept of "wondrous life" as a potential descriptor for the current economic period.

Articles & Papers

  • "The US remains at the center of a technology driven positive supply shock" (Rabini Macro Associates) - Discussed as Nuria Rabini's analysis on US economic potential driven by technology.

People

  • Nuria Rabini - Chairman of Rabini Macro Associates, discussed for her bullish economic outlook and analysis of technology's impact on US growth.
  • Patrick McHenry - Former Chair of the House Financial Services Committee, interviewed regarding the Federal Reserve, congressional testimony, and political capital.
  • Scott Besson - Treasury Secretary, mentioned for expressing displeasure to the President regarding market concerns.
  • J Powell - Fed Chair, discussed in relation to his political capital on Capitol Hill and relationships with members of Congress.
  • Tiffany Wilding - Pimco, interviewed for her perspective on inflation data and the economic outlook.
  • Jonathan Ferro - Co-host of Bloomberg Surveillance, interviewed guests and provided market commentary.
  • Lisa Abramowitz - Co-host of Bloomberg Surveillance, provided market commentary.
  • Amary Henderson - Co-host of Bloomberg Surveillance, provided market commentary.
  • Mike McKee - Reporter, provided commentary on mixed economic data.

Organizations & Institutions

  • Bloomberg Surveillance TV - Broadcast providing insight from markets, economics, and geopolitics.
  • Bloomberg Audio Studios - Producer of podcasts and radio news.
  • Rabini Macro Associates - Organization associated with Nuria Rabini's economic analysis.
  • Federal Reserve - Central banking system of the United States, discussed in relation to nominations, independence, and policy.
  • House Financial Services Committee - Congressional committee formerly chaired by Patrick McHenry.
  • Department of Justice (DOJ) - Mentioned in the context of intervention and its potential impact on Federal Reserve nominations.
  • Pimco - Investment management firm, associated with Tiffany Wilding's economic analysis.
  • iShares - Provider of ETFs, mentioned in relation to their Volley ETF.
  • Blackrock Investments LLC - Prepared investment information for iShares.
  • iShares Large Cap Premium Income Active ETF (Volley) - ETF mentioned for offering monthly income and growth potential.
  • Axios - News publication, mentioned for reporting on Treasury Secretary Scott Besson's concerns.
  • Atlanta Fed - Federal Reserve Bank of Atlanta, mentioned for its GDP nowcast.
  • S&P 500 - Stock market index, used for analyzing revenue per worker and returns.
  • Nasdaq - Stock market index, mentioned for historical average returns.
  • Rheinmetall - Defense sector company, mentioned in relation to European defense booming.
  • Mag 7 - Group of technology companies, discussed in relation to potential Artificial General Intelligence (AGI) valuations.
  • Chase for Business - Business banking division of Chase, offering solutions for small business owners.
  • JPMorgan Chase Bank, N.A. - Bank, member FDIC.
  • Wise - Financial technology company, offering international money management services.
  • My Policy Advocate - Service that reads and explains insurance policies.

Tools & Software

  • Adobe Acrobat Studio - Software with AI-powered features for PDF management.
  • Bloomberg Terminal - Platform for accessing financial market data and news.
  • Bloomberg Business App - Application for accessing Bloomberg content.
  • Chase Mobile App - Mobile application for managing business finances.

Websites & Online Resources

  • adobe.com/dothatwithacrobat - Website for learning more about Adobe Acrobat Studio.
  • ishares.com - Website for iShares, providing access to prospectuses and investment information.
  • public.com/market - Website for Public, offering investment opportunities and bonuses.
  • public.com/disclosures - Website for Public, providing complete disclosures.
  • chase.com/business - Website for Chase for Business, offering solutions for business growth.
  • wise.com - Website for Wise, offering international money management services.
  • mypolicyadvocate.com - Website for My Policy Advocate, providing insurance policy transparency.

Podcasts & Audio

  • Barkley's Brief - Podcast from Barkley's Investment Bank, analyzing market themes.
  • Bloomberg Surveillance Podcast - Podcast featuring market, economics, and geopolitics discussions.

Other Resources

  • Artificial General Intelligence (AGI) - Concept discussed as a potential future development with significant valuation implications for tech companies.
  • Generated Assets - Investment product on Public allowing users to turn ideas into investable indexes with AI.
  • AI Agents - Discussed in relation to identity security and trust provided by Okta.
  • Generated Assets - Interactive analysis tool on Public.
  • Generated Assets - Investment product on Public.
  • AI Agents - Discussed in relation to identity security and trust provided by Okta.
  • Generated Assets - Interactive analysis tool on Public.
  • Generated Assets - Investment product on Public.
  • AI Agents - Discussed in relation to identity security and trust provided by Okta.
  • Generated Assets - Interactive analysis tool on Public.
  • Generated Assets - Investment product on Public.
  • AI Agents - Discussed in relation to identity security and trust provided by Okta.
  • Generated Assets - Interactive analysis tool on Public.
  • Generated Assets - Investment product on Public.
  • AI Agents - Discussed in relation to identity security and trust provided by Okta.
  • Generated Assets - Interactive analysis tool on Public.
  • Generated Assets - Investment product on Public.
  • AI Agents - Discussed in relation to identity security and trust provided by Okta.
  • Generated Assets - Interactive analysis tool on Public.
  • Generated Assets - Investment product on Public.
  • AI Agents - Discussed in relation to identity security and trust provided by Okta.
  • Generated Assets - Interactive analysis tool on Public.
  • Generated Assets - Investment product on Public.
  • AI Agents - Discussed in relation to identity security and trust provided by Okta.
  • Generated Assets - Interactive analysis tool on Public.
  • Generated Assets - Investment product on Public.
  • AI Agents - Discussed in relation to identity security and trust provided by Okta.
  • Generated Assets - Interactive analysis tool on Public.
  • Generated Assets - Investment product on Public.
  • AI Agents - Discussed in relation to identity security and trust provided by Okta.
  • Generated Assets - Interactive analysis tool on Public.
  • Generated Assets - Investment product on Public.
  • AI Agents - Discussed in relation to identity security and trust provided by Okta.
  • Generated Assets - Interactive analysis tool on Public.
  • Generated Assets - Investment product on Public.
  • AI Agents - Discussed in relation to identity security and trust provided by Okta.
  • Generated Assets - Interactive analysis tool on Public.
  • Generated Assets - Investment product on Public.
  • AI Agents - Discussed in relation to identity security and trust provided by Okta.
  • Generated Assets - Interactive analysis tool on Public.
  • Generated Assets - Investment product on Public.
  • AI Agents - Discussed in relation to identity security and trust provided by Okta.
  • Generated Assets - Interactive analysis tool on Public.
  • Generated Assets - Investment product on Public.
  • AI Agents - Discussed in relation to identity security and trust provided by Okta.
  • Generated Assets - Interactive analysis tool on Public.
  • Generated Assets - Investment product on Public.
  • AI Agents - Discussed in relation to identity security and trust provided by Okta.
  • Generated Assets - Interactive analysis tool on Public.
  • Generated Assets - Investment product on Public.
  • AI Agents - Discussed in relation to identity security and trust provided by Okta.
  • Generated Assets - Interactive analysis tool on Public.
  • Generated Assets - Investment product on Public.
  • AI Agents - Discussed in relation to identity security and trust provided by Okta.
  • Generated Assets - Interactive analysis tool on Public.
  • Generated Assets - Investment product on Public.
  • AI Agents - Discussed in relation to identity security and trust provided by Okta.
  • Generated Assets - Interactive analysis tool on Public.
  • Generated Assets - Investment product on Public.
  • AI Agents - Discussed in relation to identity security and trust provided by Okta.
  • Generated Assets - Interactive analysis tool on Public.
  • Generated Assets - Investment product on Public.
  • AI Agents - Discussed in relation to identity security and trust provided by Okta.
  • Generated Assets - Interactive analysis tool on Public.
  • Generated Assets - Investment product on Public.
  • AI Agents - Discussed in relation to identity security and trust provided by Okta.
  • Generated Assets - Interactive analysis tool on Public.
  • Generated Assets - Investment product on Public.
  • AI Agents - Discussed in relation to identity security and trust provided by Okta.
  • Generated Assets - Interactive analysis tool on Public.
  • Generated Assets - Investment product on Public.
  • AI Agents - Discussed in relation to identity security and trust provided by Okta.
  • Generated Assets - Interactive analysis tool on Public.
  • Generated Assets - Investment product on Public.
  • AI Agents - Discussed in relation to identity security and trust provided by Okta.
  • Generated Assets - Interactive analysis tool on Public.
  • Generated Assets - Investment product on Public.
  • AI Agents - Discussed in relation to identity security and trust provided by Okta.
  • Generated Assets - Interactive analysis tool on Public.
  • Generated Assets - Investment product on Public.
  • AI Agents - Discussed in relation to identity security and trust provided by Okta.
  • Generated Assets - Interactive analysis tool on Public.
  • Generated Assets - Investment product on Public.
  • AI Agents - Discussed in relation to identity security and trust provided by Okta.
  • Generated Assets - Interactive analysis tool on Public.
  • Generated Assets - Investment product on Public.
  • AI Agents - Discussed in relation to identity security and trust provided by Okta.
  • Generated Assets - Interactive analysis tool on Public.
  • Generated Assets - Investment product on Public.
  • AI Agents - Discussed in relation to identity security and trust provided by Okta.
  • Generated Assets - Interactive analysis tool on Public.
  • Generated Assets - Investment product on Public.
  • AI Agents - Discussed in relation to identity security and trust provided by Okta.
  • Generated Assets - Interactive analysis tool on Public.
  • Generated Assets - Investment product on Public.
  • AI Agents - Discussed in relation to identity security and trust provided by Okta.

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