*Originally published August 18, 2023
By: Tim Courtney, Chief Investment Officer
There's no doubt that the AI phenomenon could potentially lead to positive transformations in our economy and society if it is used thoughtfully. It is also true that this is not the first time the market has become fascinated with a new, promising technology. Let’s review two critical economic issues that the market hopes AI will address.
The first issue revolves around productivity. We are currently facing stagnation in real wages and productivity growth. Traditionally, increasing productivity has been the key to boosting real wages.1 However, over the past several years, productivity growth has remained alarmingly close to zero.1 This is in spite of the trillions of dollars that companies have spent on technology designed to increase productivity. Since the end of 2021, the labor force has grown by about 3%. However, that 3% additional labor force produced only 2% more GDP over that time.6 While it is over a relatively short time period, this discrepancy is an example of the challenges we face in improving productivity, and so far the expensive technology companies have paid for have had little effect.
The second problem relates to the scarcity of labor. Many sectors are currently grappling with a labor shortage, which, in turn, drives up wages and prices.3 There has also been a misallocation of labor and talent in the US. We saw in 2020 and 2021 how certain companies, especially technology names, hoarded talent only to let employees go in 2022 when the market turned. The US hasn’t allocated its labor well over the last decade, resulting in certain industries having shortages, delayed project completions and higher costs.
AI could help allocate labor better and send talent where it is needed most. This could free up the workforce to focus on more strategic and creative endeavors.4 AI has the potential to play a significant role in addressing our productivity challenge. By enhancing automation and optimizing processes, AI could help certain workers become more efficient and productive2, leading to increased output and eventually higher real wages.
These are the opportunities for improvement that the market hopes AI can fulfill, though we should remember that the market has a tendency to become infatuated with new technologies and inflate valuations of those companies it thinks will benefit the most. Our current scenario has parallels to the dot-com bubble of the early 2000s. Some companies were given extremely high valuations only to see those valuations plummet when reality didn’t unfold as expected.5 And although the internet certainly did change the economy and create many efficiencies, the eventual winners were often different companies than those the investors had initially bet on.
As with any emerging technology, the winners of the AI potential will only become clear over time. And as an investor, even if we fund a company that greatly benefits from AI capabilities, we still need to ensure we are not overpaying for the asset. The price we pay for an asset is the greatest determinant of our future return. If you have any questions, please contact your Exencial advisor.
- McKinsey Global Institute (2/16/23) — Rekindling US productivity for a new era
- Forbes (6/29/23) — Enhancing Labor Resources With AI to Optimize Human Downtime
- McKinsey & Company (3/28/22) — Bridging the labor mismatch in US construction
- Whitehouse.gov (12/5/22) — The impact of artificial intelligence on the future of the workforce in the European Union and the United States of America
- Investopedia (6/13/23) — Dotcom bubble definition
- St. Louis Fed (6/30/2023) – Real Gross Domestic Product (12/31/21 level of $20.006T and 06/30/23 level of 20.404T) and Civilian Labor Force Level (12/31/21 level of 162.4M and 06/30/23 level of 167.1M)
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