The Economic Rescue Awaited from AI's Growth Sparks Remains Distant

Artificial intelligence has surged into the limelight, energizing the stock market and fostering speculation about its transformative potential. Companies like Nvidia, Microsoft, and Palantir Technologies have witnessed soaring valuations, largely attributed to the promise of AI.

However, while AI is rapidly advancing in several domains, its substantial impact on the economy remains a distant prospect. The widespread adoption necessary for a significant productivity boost is likely several years away.

McKinsey's Director of Research and Economics, Tera Allas, highlights the colossal potential, stating that today's technology could automate up to 60% to 70% of current tasks. Yet, on an economy-wide scale, the anticipation surpasses the present reality, primarily due to adoption challenges.

Estimates by McKinsey and others project AI's potential to enhance productivity and economic growth in the long term. McKinsey suggests that AI could contribute between 0.1 and 0.6 percentage points to annual productivity growth, correlating with economic advancement. Goldman Sachs, envisioning maximal adoption, suggests a growth effect of up to 1.5 percentage points. However, a more realistic projection hovers around an average of 0.4 points over the next decade, with a gradual buildup toward that average.

This sluggish timeline for AI's transformative impact is unfortunate, particularly as economic growth forecasts appear bleak. The Federal Reserve's December projections foresee a decline in growth to 1.4% this year from 2.6% at the end of 2023, with a modest uptick expected thereafter but remaining below 2% in 2025 and 2026. This contrasts starkly with the U.S.'s long-term average growth rate of approximately 3%.

Joseph Briggs of Goldman Sachs emphasizes that the substantial GDP growth from generative AI might materialize in the latter half of the decade and into the 2030s, reframing it as a story for the more distant economic future.

The promise of AI lies in its potential to bolster productivity, the cornerstone of GDP gains. Nobel laureate Paul Krugman's assertion that "productivity isn't everything, but in the long run, it's almost everything" underscores this significance. Economically, the size of the economy equates to output per worker multiplied by the number of workers. However, the latter tends to evolve slowly, posing concerns, especially in aging populations like the U.S., where the working-age population's growth is stagnating or declining.

McKinsey's analysis underscores productivity's pivotal role in driving economic growth over the last three decades, although notable gains have tempered since 2012. Historical instances of productivity booms, such as the introduction of steam power, electricity, or the internet, have significantly propelled economic growth. Similarly, AI's potential gains are projected to be substantial, though unevenly distributed across industries.

The current beneficiaries are primarily technology firms like Nvidia and Microsoft, while the next wave may favor white-collar occupations involving repetitive tasks. McDonald's, for instance, plans to apply generative AI to automate order stations and optimize food delivery by 2024. However, industries reliant on manual labor, such as construction and landscaping, might experience a slower integration of AI despite eventual impact across all sectors.

Scott Likens of PwC anticipates this as the initial wave, with broader acceptance and adoption of generative AI poised to accelerate the curve. Nonetheless, the delayed and staggered implementation of AI, coupled with the inherent difficulty in precisely forecasting its impact, substantiates the wide-ranging projections by McKinsey and Goldman Sachs. Realizing tangible growth benefits may necessitate further breakthroughs akin to generative AI.

Neil Shearing, Chief Economist at Capital Economics, urges a prudent approach, considering productivity's complex nature and the challenges in quantifying it. He suggests a degree of skepticism toward forecasts, highlighting that any positive surprises in U.S. growth for 2024 might stem from unexpectedly robust consumer activity rather than immediate AI impacts.

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