The AI boom is soaking up investor cash, staving off a recession, and showing signs of faltering, David Rosenberg says.
AI is “sapping the momentum out of the rest of business capital spending,” the veteran economist said during the latest episode of the “Excess Returns” podcast.
Rosenberg estimated that 50% of all corporate investment is going toward AI-related items, and that segment of spending is growing around 18% annually in real terms, while capital spending in the “old economy” is declining.
He was responding to Richard Bernstein, the global head of macro at Janus Henderson Investors, saying that, similar to how the energy sector was “starved for capital” during the dot-com boom, money is flowing into building data centers instead of residential homes, fueling the housing shortage and affordability crisis.
Rosenberg, known for calling both the dot-com and housing crashes, said the economic backdrop is very different now than during the internet bubble.
The Rosenberg Research president, previously Merrill Lynch’s chief North American economist, said that “nobody was talking about a K-shaped economy back then. The consumer was really strong across the board. You can’t say that today.”
“When you strip out the AI spend, the economy is actually very weak,” Rosenberg said. He pointed to the housing sector contracting and weakness in auto sales and non-tech manufacturing.
“Without the AI boom, we probably would be in a recession,” he added.
The US economy grew at an annualized 1.5% in the second quarter of this year, down from 2.1% in the first quarter. It unexpectedly lost 23,000 jobs in July, upending the Wall Street consensus that it would gain 85,000 jobs.
Just like in the lead-up to the 2008 financial crisis, Rosenberg said he expects debt investors to spot warning signs before stock investors do.
“I think the credit market will lead the ultimate rolling over of this AI trade,” he said, pointing to early red flags such as rising financing costs and spreads on credit default swaps (CDS), a form of insurance against loan defaults, widening “pretty dramatically.”
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