Recalibrating the Economy: A New Years’ Resolution
As the holiday season draws to a close, thoughts are turning to the new year with predictions and forecasts of what the next two months will bring for the economy. The law of averages says some of them will be flat-out wrong while others will come closer to the mark. But they will all be off because the way we judge the relative health of the economy needs to be recalibrated.
The statistical foundation of grading the economy has been around for awhile and most people are familiar with the basics. Low inflation, low unemployment and good consumer spending are the foundation, along with low interest rates. But the benchmarks for those measurements come from a bygone era where high-tech tools and artificial intelligence were the stuff of science fiction rather than business fact. But the interpretation of economic statistics has not taken that into account.
Gross domestic product growth of 2% to 3% is generally considered good and healthy for developed countries. Interest rates between 2% and 3.5% are likewise deemed neutral because any higher would slow growth and any lower could spike inflation. On the jobs front, unemployment between 3.5% and 4.5% is considered full employment and with the U.S. at a 4.6% rate right now, it is pretty close.
Beyond the multi-billion investments in AI in 2025 lifting Wall Street’s boats, the integration of AI systems into the business life of the nation has dramatically increased productivity. Historically, U.S. productivity has grown around 2.2% annually since World War II. While technological advances account for a lot of that, AI has shifted productivity growth into high gear, accounting for 2.2% growth itself. Likewise, the impact of AI is responsible for 40% of GDP growth in 2025 and is projected to lift the GDP by 3% over the next 30 years.
While the overall boost from AI and high-tech is part of the long march of technological innovation, its impact needs to be accounted for in assessing the health of the economy. In effect, AI has put economic growth on steroids.
Olympic athletes, after failing tests for performance-enhancing drugs, are routinely stripped of their medals, their world records erased and suspended or even banned from competition. In baseball, hitting 500 home runs is no longer the golden ticket to the Hall of Fame after the steroid era.
Is it possible we Americans take sports more seriously than the economy? Understanding that high-tech tools and artificial intelligence are performance- enhancing drugs for the economy, means the conventional wisdom on what constitutes a good unemployment rate, the proper level of inflation or a good gross domestic product report no longer applies. And from that perspective, it is much easier to understand the disconnect between economic statistics and consumer malaise. What used to constitute a “good” economy no longer suffices. The statistics are based on a different economy – a pre-AI economy – and fit current conditions like a square peg in a round hole.
We can either force that peg to fit, albeit uncomfortably, or reconsider our baseline assumptions about what a good economy is and how we measure it.
