When A.I. Spending Starts Slowing, Start Worrying About Recession | Wolf Richter

Wolf Richter · Wolf Street Corp (WOLF STREET)

Stock wealth from AI and equity gains is driving much of the current consumer spending.

Richter says many consumers are wealthy from stock investments. Retirees who are fully invested in stocks are spending that money, and young workers in San Francisco earn large amounts from AI companies. Employees also borrow against stock they cannot sell. He sees that spending as a main driver of the current boom.

“lots of consumers are wealthy because of their investments in stocks, a lot of retirees a 100% invested in stocks, they're spending this money”at 6:53

Wolf Richter · Wolf Street Corp (WOLF STREET)

The K-shaped label is wrong: lower-income groups are rising too, just more slowly than the top.

Richter argues that the lower 70% of households are not falling, just rising more slowly than the top group. He cites median married-couple income of about $128,000 and says household medians are dragged down by singles, widows and students. He describes the pattern as two legs both going up, one more slowly.

“that's not the problem this economy has. So even at the lower level, the lower 70%, however you want to carve that out, that's not going down. It's going up, but it's going up more slowly than the upper leg.”at 35:55

Wolf Richter · Wolf Street Corp (WOLF STREET)

US consumers are spending and paying off cards; credit card delinquencies are low, so the K-shaped story is wrong.

Federal Reserve data shows Americans spent about $7 trillion on credit cards in 2025, against roughly $1.3 trillion in statement balances. Only about $500 billion is interest-bearing debt, and most balances are paid off monthly. Prime-borrower card delinquency is about 0.8%, near historic lows. Overall card delinquency is about 2.8%, up from pandemic lows of about 1.5% but well below the 6.5% of the financial crisis and above 4% before 2008. Delinquencies are concentrated among higher-income borrowers, not poor households, which cannot get large cards. Foreclosures are still below 2019 levels. The subprime auto spike came from lenders failing and is now easing. He argues the 'K-shaped economy' framing is clickbait: the New York Fed's own charts show both groups rising, just at different speeds.

“credit card delinquencies are low, they're not a problem”at 48:14

Wolf Richter · Wolf Street Corp (WOLF STREET)

Consumer sentiment surveys are political, since Michigan results diverge by party, so they are not economic signals.

He dismisses consumer sentiment surveys such as the University of Michigan survey as political hogwash. When the results are split by Democratic- and Republican-leaning respondents, they move in opposite directions, which shows the survey measures partisanship rather than economic conditions. He contrasts this with people's own finances, which he sees as strong.

“a lot of these consumer sentiment surveys are just political hogwash, like the University of Michigan consumer sentiment survey”at 54:48

Wolf Richter · Wolf Street Corp (WOLF STREET)

Bond market is complacent: yields near pre-QE levels and corporate spreads still historically narrow.

Yields are back where they were before quantitative easing. Spreads between Treasuries and corporate debt have widened slightly but remain at historically narrow levels, which Richter reads as investors being too relaxed about risk.

“the bond market is still in la la land. I mean, the yields are back where they used to be before QE, the spreads have widened a little between treasuries and corporate debt but they're still at historically narrow levels”at 3:47

Wolf Richter · Wolf Street Corp (WOLF STREET)

Subprime auto loan delinquencies spiked after lenders failed, but are now falling; subprime is a small share of car lending.

Several subprime auto lenders, including Tricolor, failed last year amid fraud and other problems. When the companies that sold cars and collected payments went under, borrowers stopped paying, so subprime delinquencies spiked. Those problems have since been sorted out, borrowers are paying again, and subprime delinquencies are coming down. Subprime is a small part of used-vehicle lending: about half of used-car purchases are cash, and roughly 15% of financed deals are subprime. It plays almost no role in new-vehicle lending.

“they're starting to make payments again and now subprime delinquencies are coming down.”at 51:22

Wolf Richter · Wolf Street Corp (WOLF STREET)

Corporate bond spreads are too tight to buy, so he avoids corporate bonds, including AI-related debt.

Yields on Treasuries have become attractive again, but corporate bond spreads over Treasuries remain too low to justify the credit risk, so he is not buying corporate bonds. He is staying far away from AI bonds, meaning debt issued to finance AI.

“the spreads are still too low for me to buy corporate bonds, so I'm not doing that. I'm staying 100 miles away from AI bonds”at 1:02:53

Wolf Richter · Wolf Street Corp (WOLF STREET)

US economy is running hot, with Q2 nominal GDP up 8.5% and inflation near 6.4%.

Q2 nominal GDP, meaning growth in current dollars, was 8.5% annualized, with about 6.4% GDP inflation across consumers, businesses and governments. Full employment and rising wages add to a picture of strong spending. Richter describes this as an economy running hot.

“In second quarter GDP, so nominal GDP without inflation... that's the economic growth in current dollars was 8.5% and... about 6.4% GDP inflation.”at 5:34

Wolf Richter · Wolf Street Corp (WOLF STREET)

A recession needs both an AI spending slowdown and a sharp AI stock selloff; neither has happened yet.

Richter says a slowdown in AI spending combined with a major selloff in AI stocks would trigger a correction and then a recession. Stock declines of 80 to 90% would make people cut spending and push companies to freeze hiring and lay off workers. He cites the dot-com bust, when a recession began about a year after the March 2000 selloff. He says he does not see those signs yet, since the stock market, bond market and consumer are all holding up.

“So slow down in AI spending combined with a sharp sell off... we need both of those to trigger that recession”at 15:31

Wolf Richter · Wolf Street Corp (WOLF STREET)

The US economy is running hot with high inflation; it is not weakening, so the economy is not on the brink.

He describes the economy as running hot, with wages rising, Americans earning and spending, and strong demand, including from the AI sector spreading across the economy. Inflation is the real problem, and public anger about it is what keeps it in check. People who have predicted economic trouble have been wrong for years. He does not see the consumer's higher income as a weakness.

“the economy is running hot, you know, it is running hot, there's a lot of inflation”at 42:53

Wolf Richter · Wolf Street Corp (WOLF STREET)

AI-related tech stocks are on an extreme valuation binge, far above the rest of the market.

Richter says AI and AI-related tech companies are on an extreme valuation binge while other stocks have plunged. He calls the scale of the run-up incredible, which he treats as evidence of a bubble.

“the AI and tech, the AI related tech companies, they're on an extreme valuation binge. I mean, it's just incredible what's happening there.”at 4:05

Wolf Richter · Wolf Street Corp (WOLF STREET)

The AI bust could be worse than the dot-com bust because far more money is involved.

Richter says the dot-com bust was bad, but much more is happening now. The inflow of money into AI is far larger than the dot-com capital spending, which included telecom and fiber build-outs. So he thinks the AI bust has a good chance of being worse.

“Think the dot com bust was bad, but there is so much going on right now. I think this [has] a good chance of being worse than the dot com bust.”at 29:32

Wolf Richter · Wolf Street Corp (WOLF STREET)

Major indices sit near all-time highs only because a few mega-cap AI stocks carry them.

Thousands of stocks have fallen 80% or more from their highs, but the largest stocks are at all-time highs with valuations in the trillions. Richter argues those few names carry the index, so the overall index masks broad weakness.

“the big stocks that are carrying the day, they're at all time highs and they have extreme valuations of trillions of dollars and so that carries the index.”at 4:22

Wolf Richter · Wolf Street Corp (WOLF STREET)

The stock market is incredibly speculative; he is out of stocks and expects 15-20% drops when the downturn comes.

He considers the stock market incredibly speculative right now, so he has exited stocks entirely and calls his stance bearish. When the downturn comes, stocks will fall 15 to 20%. Investors who think 'that went down 15% or 20% before' and hang on will see another 20% drop, as in the dot-com bust. Individual stocks can fall 80 to 90%. He argues that bonds let people weather such a drop calmly.

“I consider the stock market incredibly speculative right now.”at 1:01:49

Wolf Richter · Wolf Street Corp (WOLF STREET)

AI spending is a roughly $1 trillion inflow into the US economy; its decline would signal recession.

Richter estimates AI spending pulls in about a trillion dollars of corporate and investor money. Much of it is raised overseas and at least partly spent in the US. He treats this flow as one leg of nominal growth, so when it starts declining he expects a recession.

“It's this huge amount of corporate money that's getting spent, that's getting drawn in globally and that's getting spent in The US economy. When that starts declining, that's when I start seeing a recession on the horizon.”at 13:51

Wolf Richter · Wolf Street Corp (WOLF STREET)

Data center buildout is spreading into US manufacturing, with turbine and power equipment orders surging.

Richter says the data center buildout is spread across the economy. Equipment like on-site power generators and gas turbines is made in many parts of the US, and durable goods orders for that equipment have skyrocketed. He expects that activity to flow into manufacturing, construction and power-line work, and to disappear when the boom stops.

“the data center build out is spread across the economy... power generators for on-site power generation, so you're talking about gas turbines... We have seen durable goods orders for that kind of equipment skyrocket.”at 32:09

Wolf Richter · Wolf Street Corp (WOLF STREET)

Bay Area home prices diverge: San Francisco is spiking while nearby cities are down about 25%.

Richter says home prices are spiking again in San Francisco because AI-linked wealth is buying homes and other goods. Oakland and other Bay Area cities have seen prices fall as much as 25% in some places. He concludes that a relatively small number of people are spending a huge amount in San Francisco.

“around the other cities in Bay Area, that's not that's not the case... Home prices are down 25% in some of those places, but not in San Francisco.”at 19:36

Wolf Richter · Wolf Street Corp (WOLF STREET)

The affordability problem is high home prices; relief needs flat-to-falling prices and rising wages over a decade or two.

Home prices surged in the US over a two-year span, and that is the real affordability problem. The fix is lower home prices, which will not come from a crash. Flat-to-downward home prices combined with rising wages would restore affordability over time. He estimates this takes a decade or two. Governments resist cheaper homes because property tax revenue falls. Homeowners, about 65% of households, benefit from rising values, so the anger comes mainly from young people and renters. High home prices also drive homeowners insurance, property taxes, maintenance, and HOA fees.

“That's the affordability problem that we have is home prices exploded but nobody wants to own an affordable home”at 55:40

Wolf Richter · Wolf Street Corp (WOLF STREET)

The Fed is tolerating above-target inflation and going along with the administration's run-hot strategy.

Richter says the administration favors running the economy hot. The Fed still talks about a 2% inflation target, but he thinks it is really on board. In his view, letting the economy run hot is the way to deal with the large federal debt.

“And the administration has come out to favor that and the Fed's still talking about 2% inflation target, but they're really on the bandwagon too and that's the way to deal with this huge debt that we have is to let the economy run hot.”at 6:05

Wolf Richter · Wolf Street Corp (WOLF STREET)

Inflation is already elevated and will stay in the 3–5% range rather than return to 2%.

Richter says inflation is already quite high and will stay in that range. He points to GDP inflation of about 6.4% in Q2 across consumers, businesses and governments. He describes inflation of 3 to 5% a year, not 2%, as the outcome the administration and Fed are accepting.

“We already have inflation. It's quite a bit of inflation. It's going to stay up there in that range.”at 6:22

Wolf Richter · Wolf Street Corp (WOLF STREET)

Growing out of the $40 trillion debt with inflation is the only realistic fix, since taxes and cuts won't suffice.

Richter says the federal debt is about $40 trillion and cannot be controlled by raising taxes or cutting spending in any Congress. Higher nominal growth and inflation of 3 to 5% a year instead of 2% would shrink the debt-to-GDP ratio and let tax revenues grow with GDP. He warns the strategy turns catastrophic at 20 to 30% inflation or if nominal growth stops and a recession hits.

“the real benefit of this is that it is a way and maybe the best way to deal with this otherwise unmanageable federal government debt... there is no way taxes can be raised enough and spending can be cut enough... And the way to do this is with higher nominal economic growth and much higher inflation”at 7:56

Wolf Richter · Wolf Street Corp (WOLF STREET)

AI revenue is uncertain and too small to pay for the investment; prices are heading toward free.

Richter argues consumers will not spend much more on AI. They already spend 96 to 97% of their income, and AI spending is limited to small subscriptions such as a Google Workspace price rise. Companies are also curtailing AI spending and shifting to free models. He compares AI to dot-com services like email, which became nearly free, and expects a similar price collapse. He concludes there will not be enough revenue to justify the investment.

“One of the biggest problems this bubble has is that the revenue model for AI is completely uncertain. And who is going to pay the amount of money that it takes to justify all these investments?”at 22:32

Wolf Richter · Wolf Street Corp (WOLF STREET)

AI is net hiring so far; labor impact exists but companies adopting AI are still adding staff.

Richter gives examples. He no longer hires a graphic designer for his ads because AI makes them in minutes, and architects use AI to cut their workload. He says there is probably some labor impact, but companies implementing AI are hiring, so the net effect is a constant flow of hiring and efficiency gains.

“And so there's probably some impact on labor. But AI is hiring. So companies that are implementing AI stuff, they're hiring.”at 25:04

Wolf Richter · Wolf Street Corp (WOLF STREET)

The labor market is tight: unemployment and layoffs are low, and wages are rising despite layoff headlines.

Unemployment is very low and layoffs are low despite the headlines. Layoff announcements from companies such as Google and Amazon are not a sign of weakness: he checked their employment and says they are hiring while cutting, which he reads as reshuffling and cost-saving. Companies are still looking for people, wages are rising, and Americans are earning and spending. He argues that layoff announcements are a way for corporate America to hold down wages by discouraging workers from leaving or asking for raises.

“Unemployment is very low, layoffs are low despite all the talk.”at 40:29

Wolf Richter · Wolf Street Corp (WOLF STREET)

Health insurance costs for those buying their own coverage before Medicare are a structural affordability problem.

People who are 55 to 65 and must buy their own health insurance, rather than getting it through an employer, face a real problem, potentially paying $2,000 a month. Medicare recipients are in good shape. This is a structural problem in the economy, not a cost of everyday goods and services.

“if you're fifty-fifty five and you have to pay for your own insurance rather than getting insurance through a corporate insurance, you have a real problem. You may be paying $2,000 a month in health insurance”at 56:49

Wolf Richter · Wolf Street Corp (WOLF STREET)

The economy is not the key midterm issue; voters' gloom about it will not drive their votes much.

He argues that feeling bad about an economy that is running hot will not have a big impact on voting, since many non-economic issues drive decisions. He qualifies this by saying he is not a political analyst and does not speculate much on elections. He also says politicians calling the economy fine is a silly message, comparing it to Biden claiming inflation was zero.

“I don't think the economy is the issue in this election.”at 59:40

Wolf Richter · Wolf Street Corp (WOLF STREET)

Longer-term Treasuries now look modestly attractive after a 40-year bond bull market ended and yields rose.

For about twenty years bond yields were too low, so bonds were not worth buying without taking big risks. Long-term Treasuries were toxic after a forty-year bull market in which yields fell and prices rose. A 30-year bond bought in summer 2020 is now down about 50%. Yields have risen to moderately attractive levels, so Treasuries are a valid option again. He is unwinding his T-bill position, has started buying TIPS, and took part in the ten-year note auction, so he is shifting toward bonds.

“longer term treasuries are starting to look just modestly appealing rather than being toxic.”at 1:03:01

Wolf Richter · Wolf Street Corp (WOLF STREET)

Gold and silver remain very high and vulnerable; he sold his silver and would not buy at current prices.

Gold is a buy-low, sell-high asset. It has fallen recently but is still very high, so for someone trying to profit it remains vulnerable. Silver is the same. He had some silver and sold it. At this price he would not buy, though he would buy at a lower level. For long-term holders, buying low and never selling is a good strategy.

“if you're trying to make a profit on gold, I think it's still very high. I think it's still vulnerable.”at 1:07:12