That’s an appealing vision. If AI meets these lofty expectations, it’s easy to imagine how it could increase the output of paralegals, coders and any number of other knowledge workers, at least on a per-hour-worked basis (the jury is still out on how many of us will remain gainfully employed.)
Still, it could take years for those productivity gains to materialize and longer for them to seep into the macroeconomic data. For a bit of cold water, look no further than the first 20 years of the current millennium, when measured labor productivity growth was anemic despite the perception of remarkable technological advancement (e.g., the near-universal adoption of smartphones.)
A third and final idea of the “normal” we’re now returning to is the world that we left behind in early 2020 when the pandemic began in earnest. For all of its problems, it was a time of low and stable inflation and subdued interest rates and everything that came along with those two features — including affordable mortgage payments and expanding stock valuations.
Some of that, of course, reflected that “peace dividend.” And low interest rates resulted from a stretch of good demographic luck (the Baby Boomer generation saving for retirements that are now under way) and demand from foreign governments and investors for “safe” Treasury securities in the wake of the financial crisis. Clearly, there are a lot of good reasons to question the durability of those trends.
So when corporate executives and policymakers talk about “normalization,” they should do a better job of defining normal. The US won’t revert to some carbon copy of the economy it left behind before the pandemic, nor is it about to reprise the 1980s or 1990s.
As for next year, my best guess is there’s room for measured optimism.
With inflation clearly receding, the Fed is likely to start cutting policy rates, helping improve long-slumping consumer confidence and defrost the housing economy. Workers hired in the frantic post-pandemic scramble for talent should continue to mature into their roles, resulting in further labor productivity gains (even without AI.) The median economist in a Bloomberg survey expects all that to add up to 1.2% annual growth in real GDP next year, but I wouldn’t be surprised if that underestimates the upside.
Meanwhile, global conflicts and the gaping budget deficit will probably fester without any alarming economic and market consequences.
In the long run, there’s considerably greater uncertainty, and we should all stop pretending that “we’ve seen this movie before.” The economy may well be fine, but it’s unlikely to return to anyone’s preconceived notion of “normal.”
Jonathan Levin is a columnist focused on US markets and economics. Previously, he worked as a Bloomberg journalist in the US, Brazil and Mexico. He is a CFA charterholder.