AI - not quite everywhere

AI - not quite everywhere

AI has driven the US stock market to new highs. Now it’s driving the US economy. In the first half of this year investment in IT and data centres accounted for all of the growth in the US economy. Tech investment accounts for just 6.1% of the total US GDP, yet between January and June, this small sector kept America growing.

• Just four companies, Google, Microsoft, Amazon and Meta, account for the lion’s share of this capital spending. They are leaving the rest of the world behind. Stanford University estimates that in 2024 US private investment in AI was 11 times Chinese levels and 5 times European levels.

• Today’s surge in AI-related stocks and investment has drawn comparisons with earlier technology-driven booms. The railways, the telephone, electric lighting and power, electronics – each successive technology has driven equity valuations and investment. The last major tech boom was in the 1990s when capital flooded into computing, networks and software and tech stocks soared. 

• That set the modern standard for tech booms, one which, in some respects, AI is exceeding. IT capex accounts for a larger share of US GDP today than at the height of the dotcom boom. Tech valuations are higher. Meanwhile tech shares are even more dominant in equity indices. The Magnificent Seven tech stocks account for a third of the US S&P 500 index today, more than twice the share accounted for by tech behemoths including Lucent, Cisco and Dell in the late 1990s.

• The dotcom boom turned to bust in March 2000, with the NASDAQ index of US tech stocks losing almost 80% of its value in the ensuing two and a half years. Investors were burned and companies failed. But the boom created new infrastructure and business models that brought lasting benefits. By the eve of the financial crisis, in 2007, the change wrought by the tech boom of the 1990s were widely thought to have raised productivity and growth rates.  

• AI companies are hoping for similar transformative effects today. While share prices and investment among AI providers have soared, the test is whether AI can raise productivity for the rest of the economy. A widely cited MIT survey of 300 companies released last month found that 95% of AI pilot projects fail. The report said that “Just 5 per cent of integrated AI pilots are extracting millions in value, while the vast majority remain stuck with no measurable [profit and loss] impact”. The Economist suggests that data security concerns, shortages of technical expertise and poorly organised data make it harder for businesses to extract value from AI.

• This could be due to lags. History shows it often takes time to fully harness the benefits of new technologies. It took more than 50 years from Faraday’s pioneering experiments to the early commercial exploitation of electricity in the 1880s. In 1987 the Nobel laureate Robert Solow famously said that “you can see the computer age everywhere but in the productivity statistics”. It was not until later, in the 1990s and early 2000s, that the productivity statistics caught up.

• A less benign explanation is that the promise of AI has been over-hyped. The Economist notes that not all tech booms lead to transformational change, pointing out that, “much of the capex by Japanese electronics firms in the 1980s ultimately served no useful function”. 

• You see AI in the stock market and in US GDP data. Now it needs to prove it can move the productivity statistics too.

OUR REVIEW OF LAST WEEK’S NEWS
The UK FTSE 100 equity index ended the week up 0.8% at 9,283.  

Economics

• US consumer price inflation increased to 2.9% in the year to August, from 2.7% in July, driven by higher food and shelter costs. Despite the increase, investors expect the Federal Reserve to cut interest rates next week
• The US Department of Justice asked the US Court of Appeals to stop a temporary order that halted US president Donald Trump’s attempts to sack Fed governor Lisa Cook from the Fed board
• US consumer confidence fell for the second consecutive month in September, according to the University of Michigan, as concerns grow over rising inflation and a slowing labour market
• Estimates of US job growth have been revised down, adding to concerns about a weakening labour market
• The G7 group of large economies discussed a US proposal to impose import tariffs of up to 100% against India and China for purchasing Russian oil
• US coffee prices rose 21% in the year to August, the highest rate since 1997, amid a global supply shortage and US import tariffs against Brazil, the world’s biggest coffee producer
• Mexico, the world’s largest buyer of Chinese cars, is expected to impose a 50% import tariff against the Chinese auto sector as part of tariff proposals on a wide range of imports
• The UK economy stagnated in July, according to official statistics, as growth in services and construction was offset by declining manufacturing activity
• UK prime minister Keir Starmer announced the creation of a “Budget Board,” containing ministers from Downing Street and the Treasury, to coordinate pro-growth policies ahead of the Budget in November
• UK chancellor Rachel Reeves said that she aims to “take out more regulators” as part of an attempt to reduce regulation that impedes economic growth
• The number of student visa applications fell in August compared with the previous year, according to official data, following tighter UK immigration rules
• Approximately 15m UK adults hold more than £614bn in excess cash, defined as holding more than six months’ income in cash, according to analysis by Barclays. This represents an increase of more than a third since 2022 and highlights the potential for greater investment in UK assets
• The European Central Bank held interest rates at 2%, as inflation remains close to the bank’s 2% target rate. ECB president Christine Lagarde said “the domestic economy is showing resilience, the labour market is solid and risks are more balanced”
• French president Emmanuel Macron appointed former defence minister Sébastien Lecornu as France’s prime minister to replace François Bayrou after losing a confidence vote over his €44bn deficit reduction plans. Mr Bayrou said “you have the power to overthrow the government” but not “to erase reality”
• The EU has enacted just 11% of the 383 recommendations in Mario Draghi’s report on improving EU competitiveness, according to the think tank the European Policy Innovation Council, highlighting the challenges in improving the bloc’s current sluggish growth rate  

Business

• The share price of US technology company Oracle increased nearly 40% last week following a strong earnings report, briefly making its founder Larry Ellison the richest person in the world
• The Danish government announced a record $9.1bn order for European air defence systems, passing over the competing US Patriot system. The Danish government claimed they had selected the system on its merits but the decision comes at a time of US-Danish tension over Greenland
• Barclays chief executive CS Venkatakrishnan said the UK government must curb public spending to tackle inflation, and warned against imposing even higher taxes on the UK banking sector in November’s budget
• US tech firms Nvidia and OpenAI are expected to announce a large AI infrastructure investment deal in the UK during Mr Trump’s planned visit, the FT reports
• US pharmaceuticals company Merck abandoned plans for a £1bn research centre in the UK, saying the UK is not “internationally competitive”, amid increased tensions between the government and the pharmaceutical industry over NHS drug prices
• Danish pharmaceuticals company Novo Nordisk will cut 9,000 jobs as part of cost-saving plans amid increased competition from weight-loss drugs produced by US competitors
• Low-cost airline Ryanair said it is prepared to cut 1m seats on routes to Spain next year in response to the increased passenger charges levied by Spanish airport operator Aena
• Kent and Greenwich universities announced plans to merge in 2026 to form a “super university” amid financial pressure in the UK higher education sector
• Mining company Anglo American agreed a merger with Canadian Teck Resources to create a $50bn organisation
• Chinese-backed mining company MMG said it is confident that the EU will approve a $500m deal to buy Anglo American’s nickel assets amid concerns over Chinese ownership
• German car manufacturer Volkswagen pledged to defend its European market leadership “by all means,” including new vehicle upgrades, amid increased competition from Chinese EV car manufacturers  

Global and political developments

• NATO fighter jets shot down approximately 19 Russian drones over Polish airspace, prompting the UN Security Council to hold an emergency meeting. Polish president Donald Tusk said the act was the “closest we have been to open conflict [with Russia] since the second world war.” The Polish government rebutted suggestions by Mr Trump that the breach of airspace could have been a mistake
• A Russian drone spent almost one hour in Romanian airspace on Sunday before leaving
• Israel launched an air strike on the political leadership of Hamas in Qatar as it vowed to “act against its enemies everywhere.” Mr Trump said he was “very unhappy” with the strikes in Qatar
• The UN nuclear watchdog, the International Atomic Energy Agency, agreed a preliminary deal to resume cooperation with Iran on inspecting its nuclear facilities
• Israel also launched missiles against Houthi rebels in Yemen and ordered an evacuation of Gaza City ahead of plans to take control of the city
• Conservative US activist Charlie Kirk, a close ally of Mr Trump, was murdered at a university event in Utah. The killing is the latest in a pattern of increasing political violence in the country
• The UK’s new home secretary Shabana Mahmood said that the UK may restrict visas for countries that are uncooperative in migrant return agreements
• UK ambassador to the US, Peter Mandelson, was sacked following criticisms over his ties to Jeffrey Epstein
• UK MPs Bridget Phillipson and Lucy Powell are the two final candidates in the contest to replace Angela Rayner as deputy leader of the Labour Party
• Brazil’s former president Jair Bolsonaro was sentenced to 27 years in prison for attempting to illegally remain in power after losing the 2022 election 

And finally… a US artist successfully paddled a 26-mile journey across the open sea in a kayak made entirely from mushrooms. The artist was inspired to make the journey to show that fungi could offer an alternative to plastic – a spore-ting achievement