US | Solid growth, risks on the horizon

The U.S. economy continues to show solid momentum. This year, at BBVA Research, we estimate growth will be 2.4%, in line with the 2.3% forecast by the International Monetary Fund.

To a large extent, this is explained by the boom in artificial intelligence (AI) investment, but expansionary fiscal policy and the increase in productivity over the last 5 years also play an important role. Even so, it is too early to say whether the higher productivity is due mostly to the adoption of AI or to structural changes brought about by the pandemic—such as increased digitalization and remote work.

However, it is a fact that the positive effects of AI are counteracting, at least for now, the harmful effects of some public policies implemented in the country, such as trade protectionism and the reduction in immigration (which has resulted in a stagnation of the labor force).

Now, the fundamental question is whether this boom in AI investment is sustainable. The strong performance of stock prices for companies related to these new technologies explains the resilience of consumption, as people have experienced wealth gains that may, however, be fragile. If the market perceives that the effects of AI will be less relevant than expected or will arrive later, there could be a correction in stock prices, with negative effects on investment and consumption.

On the other hand, there are fiscal risks: the United States shows very high public deficits, of around 6% of GDP. These, with a labor market that presents an employment rate close to full employment and the economy growing above its potential, represent an irresponsibility by constituting a pro-cyclical fiscal policy that is placing U.S. public debt on an unsustainable trajectory. As a result, 30-year government bond yields are at their highest level since 2007.

Furthermore, inflationary pressures due to increases in energy prices—the result of the closure of the Strait of Hormuz—and import tariffs may limit the Federal Reserve's ability to respond if the aforementioned risks to consumption and investment materialize.

In conclusion, the United States shows economic momentum, explained above all by investment in AI. But there are risks on the horizon: the sustainability of the AI boom itself and of public finances, the inefficiencies of trade protectionism, and the negative effects on consumers' purchasing power brought about by the war in Iran, are elements that could, alone or together, lead to a significant correction to the outstanding economic expansion observed since the end of the pandemic.