The stock market is at a record high while consumer sentiment is at a record low. Meanwhile, businesses are cautiously optimistic but hesitant to invest, creating a confusing economic picture. This divergence suggests different segments are reacting to vastly different drivers, from AI optimism to inflation anxiety.
AI is driving the stock market to new highs, increasing the wealth of those invested. Simultaneously, the fear of AI-driven job displacement is a major factor depressing consumer sentiment. This creates a unique situation where the same technology simultaneously enriches and frightens different segments of the population, or even the same individuals.
While AI is expected to be disinflationary long-term, its immediate impact is inflationary. Massive investment in data centers and chips drives up demand and prices for those goods. This demand-side pressure, plus wealth effects from the AI stock rally, currently outweighs any supply-side productivity benefits.
Young adults unable to afford a home are redirecting savings, once intended for a down payment, into the stock market. This influx of capital, facilitated by user-friendly trading platforms, contributes to market highs, representing a significant shift in generational wealth-building strategies from real estate to equities.
Amid euphoric markets and dire consumer sentiment, the podcast argues that the most accurate economic signal comes from businesses. Their hesitancy to expand payroll or make large investments reflects a pragmatic assessment of uncertainty. This "sitting on their hands" approach points to an economy that will grow modestly, not boom or bust.
Recent history, from the pandemic to geopolitical shocks, has taught investors that market downturns are short-lived and followed by strong rallies. This conditioning creates a "learned optimism," where being quick to reinvest has been a consistently lucrative strategy, explaining the market's resilience and rapid bounce-backs from negative news.
High-paid white-collar workers losing jobs to AI may not file for unemployment insurance (UI). The benefits are often too low to be meaningful for them, and the application process is cumbersome. This could mean that official UI claims data is understating the true extent of labor market softening in professional services industries.
Consumer sentiment is low not just because of inflation but due to the psychological weight of a constant barrage of overlapping crises (a "polycrisis"). The volume of uncertainties—geopolitical, technological, economic—creates an incessant feeling of instability that weighs on consumers, even when their personal finances are stable.
Economists focus on the slowing rate of inflation, but consumers are anchored to pre-COVID price levels. The fact that goods still cost significantly more is the primary driver of negative sentiment. This "anchoring effect" means that even with decelerating inflation, consumer frustration persists because their purchasing power feels permanently diminished.