AI, demographics and the US economy

Quantifying the impact of long-term shifts in technology, demographics, globalisation and more to understand how they could shape markets and investing in the years ahead.

The US economy’s coming decade will be shaped by a tug-of-war between artificial intelligence (AI) and demographics-driven deficits. The victor—and its margin of victory—will determine whether economic growth exceeds its disappointing pace since the global financial crisis or slows further.
We generate and quantify this insight with the Vanguard Megatrends Model™. The model quantifies the impact of slow-moving supply-side forces, or megatrends, on the economy and financial markets. Focusing on four key variables—real GDP growth, inflation, the federal funds rate and stock market valuations—we review how megatrends have driven economic and financial outcomes over the last 130 years and we assign probabilities to future outcomes.
The most likely outcome is optimistic: AI catalyses a surge in worker productivity, offsetting demographic pressures. But the next most likely outcome is pessimistic: AI fails to meet our expectations, growth tumbles and this puts pressure on the US government’s balance sheet. In both cases, the nominal federal funds rate is likely to remain above 4%. And despite its recent spike, inflation is likely to remain contained, consistent with the US Federal Reserve Board’s price stability mandate. We find little support for the consensus view that the next decade will look like the past decade of slow but modest growth.