00:00 Speaker A
Bloomberg reports that Kevin Hassett has emerged as the front runner to be the next Fed chair, uh, uh, to replace J Powell. Joining me now is Stephanie Roth, Wolf Research, chief economist. Stephanie, it’s good to see you. You, like all of us, you’re thinking about 2026. You’re trying to figure out what the picture is going to look like here. And you guys are looking for kind of trend growth, if I’m not mistaken, in terms of GDP for 2026. So, how do you think that’s going to play out?
00:33 Stephanie Roth
Yeah, so I mean it should be a decent year. This year it’s been slightly below trend. We should see a bit of a pickup. Specifically heading into uh tax season, which is where you’ll see some consumer benefits, which should help specifically the sort of mid to lower end consumer. So there should be a benefit there. Now, it’s not going to be a very robust year, but it should be fairly decent, which is one where the Fed’s likely to cut uh in December and then they’re probably going to be on hold for a little while because growth will be picking up, inflation will be a bit elevated in Q1. So then we’re talking about potential cuts kind of after the next Fed chair, once it’s perhaps it’s Hassett, once uh he gets into position, then we’re talking about potentially two more cuts. But it should be a decent year, inflation should be decelerating, uh and consumers should be looking a little bit better than they’ve been.
01:16 Speaker A
Stephanie, how much of the um gains in economic growth, right, right now and then headed into next year is sort of related to AI, the spending on AI, what companies are doing around AI. How do we sort of quantify that?
01:37 Stephanie Roth
Yeah, so we’ve we’ve looked at uh sort of the AI component within GDP and our our estimate suggest that it’s currently from a on a level basis, the actual size of AI spending uh related to CAPEX is about 1 and a half percent of GDP. That compares to larger investment bubbles which are three and a half to four and a half percent of GDP. So we’re certainly not in bubble territory in terms of the level of investment. As for how much it’s been contributing to the economy, our sense is it’s uh boost it’s kind of representing about a quarter of the GDP growth that we’re seeing. Uh so certainly important, uh not necessarily game-changing, you hear estimates out there that suggests it’s about half of GDP growth. We don’t think that’s the case, certainly smaller than that, but also fairly substantial port portion of the the growth that we’ve been seeing.
02:16 Speaker A
So, if even if it’s not, you know, huge, but it’s still substantial, you know, we talk a lot about how dependent the stock market is on the AI trade. We’ve talked less about how dependent the economy is on the AI trade. And so I wonder if you share any of the concerns out there about overinvestment and whether um the AI the AI part of the economy is a risk at the margin if it slows down.
02:36 Stephanie Roth
Yeah, at the margin it is a risk. Uh certainly if it slows down because it has been an important driver of growth if not the primary driver. Uh however, it doesn’t appear to be uh sort of in bubble or frothy territory. Of course, now we’re starting to to get to the phase where uh we’re shifting more towards debt financed growth as opposed to it being mostly coming from cash flow. So of course that becomes incrementally more risky. Uh but as of now, it doesn’t appear to be something that we should be overly concerned about. The capex is likely to be fairly strong for 2026. Companies need to um need to kind of race to to the investment cycle. They don’t want to be left behind. We don’t really know the the real benefits of AI from an economic perspective. That will take a lot longer to play out. So up until then companies are going to just continue to to invest uh until perhaps we realize they’ve invested too much and then it might be at risk above the territory, but we are a ways away from that.