If AI continues to disrupt, if not destroy, more and more business models, won't that cause a recession? It might if it triggers lots of white-collar layoffs, which in turn lead to blue-collar job losses (chart). Alternatively, it might cause a credit crunch in the private credit markets. UBS Group AG has raised its private credit default forecast, with its strategists warning that losses could reach as high as 15% in a worst-case scenario, up from 13% just weeks ago, Bloomberg reported. The bank said the increase reflects growing fears that rapid AI disruption could trigger severe stress among corporate borrowers. Technology companies, in particular, are seen as highly vulnerable to AI-driven upheaval. Current default levels in private credit are estimated at 3%–5%.
We aren't too worried about this latest recession mongering. In the worst-case scenario, the Fed will quickly step in with emergency liquidity facilities to avert an economy-wide credit crunch and downturn. We expect that laid-off coders will be replaced with "prompters," who can work most efficiently with AI tools to boost their companies' productivity. Yesterday, we observed that Indeed's job postings for software developers is currently up 11% y/y!
Meanwhile, we remain impressed by the resilience of the economy. Consider the following:
(1) Consumer spending. The weekly Redbook Retail Sales index rose 6.7% y/y last week (chart). It should remain strong in the coming weeks. Many taxpayers are expected to see significant refunds this tax season. Early estimates from the Treasury Department suggest the average refund could rise by roughly $1,000, potentially bringing the typical check to nearly $4,000—up from approximately $3,100 last year. This increase is largely driven by the One Big Beautiful Bill Act (OBBBA), which was signed into law in July 2025 and applied many of its tax-cutting provisions retroactively to the 2025 tax year.
(2) Employment. Initial and continuing unemployment claims have been trending downwards in recent weeks, suggesting that layoffs remain low and that the duration of unemployment might be decreasing (chart). We are expecting another upside surprise in February's employment report following January's better-than-expected results.
According to The Conference Board's Consumer Confidence Index survey, the share of respondents saying jobs are plentiful edged up last month, but the share saying jobs are hard to get also rose (chart). The share saying that jobs are available fell to 51.4% from roughly 55% in February. We think these responses are consistent with a stabilizing jobs market.
(3) Manufacturing. Manufacturing improved in January. Both the national ISM manufacturing purchasing managers survey and the average of the regional business surveys conducted by 5 of the 12 Fed district banks moved back into expansion territory together for the first time since January 2025 (chart). February's regional surveys remained upbeat.
The national M-PMI orders index was strong during January (chart). The regional surveys suggest February was also solid (chart)
(4) Coincident indicators. The Conference Board's Index of Coincident Economic Indicators flattened out at a record high late last year, while the S&P 500 forward earnings per share has been rising at a brisk pace to fresh record highs (chart). We think that the latter is a better indicator of GDP than is the former.
(5) Bull/Bear Ratios. Last, but not least, we are pleased to see some easing in bullish sentiment (chart). That may be a contrarian signal that the recent "rebalancing pullback " in the stock market might end soon.
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