UBS On-Air: Paul Donovan Daily Audio 'Reassessing markets, not economics'

Paul Donovan · UBS Global Wealth Management

The AI equity correction will not meaningfully change US household spending at this stage.

The AI equity market correction is not likely to change the spending of the average US household, or of any household at this stage. Households are not likely to change consumption patterns because the Nasdaq had a bad day, so the economic effect of the AI market reassessment is small. The political reassessment of AI matters least economically compared with the Gulf situation.

“The AI equity market correction is not likely to impact the spending behavior of the average U.S. Household, or indeed any household at this stage.”at 0:31

Paul Donovan · UBS Global Wealth Management

Flat-to-negative real wage growth is forcing US households to cut their savings rate to sustain spending.

On most accounts, inflation-adjusted wage growth is flat to negative in the US. Average hourly earnings are not the same as wages because they are distorted by changes in the composition of the labour force. Because real wages are not rising, households have had to trim their monthly savings rate to maintain consumption growth.

“Although on most accounts, inflation adjusted wage growth is flat to negative in The States, which is why households have had to trim their monthly savings rate to maintain consumption growth.”at 3:09

Paul Donovan · UBS Global Wealth Management

The Michigan consumer sentiment poll has low economic information value due to polarization, though it still matters politically.

The Michigan consumer sentiment poll is becoming redundant because its primary focus is its influence on politicians. Its useful information content for economists is very low given the degree of political polarization in the US. However, politics still matters because concerns about the economy seem to have been a significant driver of recent voting intentions, and perceptions of living standards are distorted by the affordability crisis.

“This is becoming a little redundant as, of course, its primary focus is via its influence on politicians. And the useful information content for economists is very low, given the degree of political polarization existing in The States.”at 3:23

Paul Donovan · UBS Global Wealth Management

Data-center builders' community inducements raise project costs, but still count as positive economic activity.

Companies may have to spend money on community projects to win over unhappy voters, which raises the cost of AI investment. However, building a school or providing other inducements is still economic activity. Such projects may even be more economically beneficial, at least in the near term, than building a data center that relies on an abstract future return.

“companies having to spend money on community projects to win over the support of voters who are not happy, for instance. But the point about that is that building a new school or providing other inducements are still a form of economic activity.”at 0:42

Paul Donovan · UBS Global Wealth Management

Higher oil prices from the Gulf conflict redistribute income from consumers to producers, permanently if prices stay high.

The back and forth over the Gulf is the issue with real economic consequences, unlike the AI reassessment. Higher oil prices are a major driver of income redistribution between oil consumers and oil producers. A persistently high oil price makes that redistribution more permanent.

“higher oil prices are a major driver of income redistribution between oil consumers and oil producers. A persistently high oil price makes the redistribution more permanent.”at 1:23

Paul Donovan · UBS Global Wealth Management

Central banks face a dilemma: a temporary oil supply shock drives inflation they cannot control.

Central banks want to sound tough because the perception is that inflation is significant and persistent. But the inflation rate is being driven by a temporary supply shock linked to the Gulf war, which they have no control or influence over. This is shown by the hawkish Bank of England vote to raise rates and its focus on the policy uncertainty caused by the war.

“Central banks have also had to struggle with the dilemma of sounding tough against the perception that inflation is significant and persistent, while at the same time dealing with the fact that the inflation rate is being driven by a temporary supply shock over which they have no control or influence.”at 1:37

Paul Donovan · UBS Global Wealth Management

US employment data precision has deteriorated, yet markets still react to past-accurate releases and models.

The precision of US employment data has been deteriorating noticeably recently. But the market's reaction seems based on the more accurate releases of the past rather than the less precise realities of today. Investors who built models around US employment are emotionally attached to these concepts, even though changes in the labour market mean the models no longer work as well as they did.

“The precision of this data has been deteriorating noticeably in the recent past. But the market's reaction to the data seems to be based on the more accurate releases of the past rather than reflecting the less precise realities of today.”at 2:24

Paul Donovan · UBS Global Wealth Management

Strong GDP growth overstates living-standard gains; most US households are not experiencing them.

The sense in the US is that the overwhelming majority of households are not experiencing the standard of living improvements suggested by the GDP growth rate. Perceptions of living standards are distorted by the affordability crisis, though this does not necessarily reflect economic reality. The gap between GDP growth and household experience is the key point.

“the overwhelming majority of U.S. Households are not experiencing the standard of living improvements that are being suggested by the GDP growth rate.”at 4:00