✊ Humans > robots

Hey hey, happy Monday!

Wall Street was stuck in a summer slumber until a few days ago.

From July 11 to 25, the S&P 500 posted its two dullest weeks of the entire year, judging by average daily move. Market experts were tossing around the word “consolidation”, which means that stocks were moving underneath a placid market surface.

Last week’s packed schedule of economic data, earnings reports and policy announcements threatened to break through the calm. And eventually they did, judging by Friday’s explosive move lower.

Today, a 5-minute read on what happened, including the important question that could dictate our economic fortunes in the coming months.

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100 Capital Efficient Companies. 1 Cost-Efficient ETF.

We’ve seen the AI vs. tariffs narrative play out in real time over the past few years.

Tariffs beat down a section of the stock market, while AI hopes lift a handful of names. Business as usual.

Now, this conflict has infected the economy, and last week’s headlines made this message overwhelmingly apparent:

The human economy is stumbling, but the robot economy is flourishing.

And Wall Street’s takes crowd (ie, the experts who have something to say about everything), started to ponder a world propelled forward by feverish AI spending. Like the biggest tech companies will be able to splurge us out of recession.

Maybe they already are, if you squint at gross domestic product data (or the total growth in the U.S. economy per quarter). Year-to-date, business spending for AI has contributed more to the economy than Americans’ budgets:

My friend Neil Dutta at Renaissance Macro first posted this stat after the second-quarter GDP report came out on Wednesday. His tweet ignited a firestorm of takes about AI’s dominance, including this post from famed startup investor Paul Kedrosky about the ramifications of the data center binge.

Some experts have celebrated the data as a proofpoint that AI is gaining ground quicker than we think. After all, spending like mad on the future has to mean that corporate America’s confidence is overcoming any nervousness around tariffs, right?

Then, the jobs report dropped on Friday. The U.S. added just 73,000 jobs last month, according to Bureau of Labor Statistics data. Even weirder, May/June hiring totals were cut dramatically because of up-to-date payroll logs reflecting fewer jobs added in state and local governments.

Add it all together, and hiring has totaled just 35,000 jobs per month since May, a three-month pace you normally see in or around recessions.

The job market is in an abysmal spot. Hiring is sparse and layoffs are picking up. Smaller data series have screamed this recently, but now the official reports back this notion up.

No wonder the robots are winning over our hearts, minds and economic indicators. It’s hard to make – and spend – money without a full-time job.

The question, however, is which side matters more in the months ahead.

Can AI really drive the economy in the second half of this year if Americans bow out?

I’m skeptical. 

If you’re new here, this is probably when I should disclose that I have my own biases. I care a lot about the human economy. In other words, how well Americans are doing and how much money they’re spending.

Rightfully so, because consumer spending is 70% of GDP. It’s very difficult for the economy to grow when nearly three-quarters of its cylinders aren’t firing. If you want a more in-depth look at my economic framework, I wrote a whole post about it.

But when I have big, heady questions about the world, I always defer to the numbers.

And the math simply isn’t mathing.

Last quarter, consumer spending totaled $16.4 trillion, while AI’s contribution to GDP – calculated as business investment in information processing equipment and software – was about $1.4 trillion.

AI investment is still peanuts compared to the sheer power of our financial decisions, even if it has technically grown more in dollar terms this year. If tariffs decimate our incomes and quash our financial decisions, then the economy is probably bound for a crisis – robots and all.

Think of it this way. Consumer spending has grown at an average 3.7% inflation-adjusted annual rate since the 2020 COVID recession ended. If we apply that same rate to the first and second quarters, then spending would’ve grown by $280 billion – almost double the $152 billion added through AI investment. If that happened, we probably wouldn’t be having this conversation.

But it didn’t. Americans’ spending slowed, lowering the bar for the robots’ success. You can bet consumers’ influence works the other way as well.

Americans’ wallets also have a long and impressive track record of powering the economy, even through the most innovative and dynamic phases of history. Since 1947, consumer spending has been the biggest driver of GDP among the “final demand” components of the economy (consumers, plus business spending and housing activity) 88% of the time.

During the 10-year economic expansion in the 1990s – you know, the era of the Internet and the dot-com bubble – consumers contributed the most to GDP growth in 90% of quarters. Yes, even as corporate America used sock puppet dogs and trading babies to convince you the Internet was the biggest financial story of that time. 

By the way, the Internet was obviously a huge financial story, but that didn’t prevent an 80% drop in tech shares and an early 2000s recession.

We haven’t even talked about the most gnarly truth, either.

The robot economy may be cannibalizing the human economy.

Not in an AI-overlords-taking-over kind of way, but close.

I mean, an AI spending spree has to come from somewhere. Cash on hand, cost savings, pure margin – from one pocket to another. Based on recent history, big tech may be ramping up its AI investments while keeping its worker headcounts steady. Favoring robots over humans, and possibly exacerbating this consumer-vs-AI split.

Check out this chart of big tech’s total investments versus headcount by year:

Big tech’s employee hoard has barely changed these past few years, and it’s on track to decline slightly this year. Sure, tech gorged on hiring in 2021, but it’s hard to deny that this halt in hiring from some of America’s biggest companies is reminiscent of broader challenges in the job market right now.

Not to mention that tech investors have to grapple with these decisions. Sure, big tech is expected to spend about $300 billion on new projects this year, but does a spendy group of stocks deserve the crown of profitability and stable margins?

Look. If I had to choose between feeling overly optimistic about AI investments or overly pessimistic about the strain on Americans, I’d choose the latter. Even though I’m OptimistiCallie (with a few bleak takes here and there, cold world right now).

You can’t just brush off the human economy’s issues right now. Consumers are too influential to ignore, and recessions have been powerful forces of nature. And even though AI is a compelling story that can’t be wiped away with one crisis, it’s hard to think it’ll single-handedly save us from the sway of 300 million wallets.

I’ll end with a hauntingly accurate insight from Julia Coronado, the founder of MacroPolicy Perspective and a well-known economist:

Couldn’t have said it better myself.

Neither could ChatGPT, let’s be real.

Thanks for reading!

Callie

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