The US economy continues to perform well. But the tail risks have increased from 10% to 30%.
What could suddenly change the current situation?
It could be geopolitics, government debt levels or a rapid rise or fall in interest rates.
Predicting the future path of AI adoption and productivity is particularly challenging.
The contribution to GDP growth from AI spending continues to increase, and as a result, if AI fails to meet expectations, the recession probability will rise, see chart below.
Similarly, if AI were to trigger a sharp rise in unemployment, it could also have a disruptive impact on the economy and financial markets.
We remain constructive on the US economic outlook, but investors should pay closer attention to tail risks than usual, because the risk of a sudden shift in investor sentiment is rising.
