Wolfe Research says AI productivity gains won't solve U.S. debt

Investing.com - Wolfe Research says artificial intelligence productivity gains will not be sufficient to resolve U.S. fiscal challenges, even under optimistic growth scenarios.

The firm says recent academic and think-tank studies show that even a permanent 50 basis point boost to productivity growth would not prevent federal debt from growing indefinitely. The Congressional Budget Office's official projections assume only 10 basis points of annual productivity growth from AI. Wolfe Research notes that recent strong labor productivity stems from high capital utilization rather than AI-driven increases in total-factor productivity.

Wolfe Research says the long end of the yield curve has come under pressure from hot economic data earlier this year, re-escalation in Iran, uncertainty about the Warsh Fed, and unsustainable fiscal deficits. Higher yields put further pressure on deficits, which the firm expects will drive federal net interest expense well above current official projections.

Treasury doubled down on front-loading issuance to shorter tenors, changing language in last week's Quarterly Refunding Announcement statement to indicate evaluation of future "changes" rather than "increases" in coupon auction sizes. Wolfe Research says it does not expect Treasury to further reduce coupon issuance, but the language underscores current concern about deficits and yields.

The firm expects high deficits to continue putting upward pressure on yields and does not see a big shift in fiscal policy before 2028. Wolfe Research expects deficits will remain stuck near 6% of GDP and says divided government in 2027 will tend to produce policy stasis.

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