The U.S. Economy Is Teetering. Here Are Three Industries to Watch

Hey what's news listeners, it's Sunday April 12th. I'm Danny Lewis for the Wall Street Journal. This is what's news Sunday, the show where we tackle the big questions about the biggest stories in the news. On today's show, the US economy has made it through a lot in recent years without rolling over. The COVID-19 pandemic, inflation, and tariffs to name a few. But many of the sectors that have powered recent growth are also vulnerable amid new shocks. We talked to three journal reporters about some of the factors that could determine which way the teetering economy goes. Will AI continue to boom or go bust? How healthy is the private credit sector? And what could happen to oil prices amid the conflict in the Middle East? Wall Street Journal reporter Joe Wallace has been covering the Iran Wars impact on oil prices, which surged to near-record highs last week before plummeting after President Trump announced a temporary ceasefire before once again rising. It's been volatile to say the least. I asked Joe how this moment compares to previous oil shocks. The biggest change if you're comparing the present day with the 1970s when they were the mother of all oil shocks following the Arab oil embargo that started in 1973 and then ironically the Islamic revolution in Iran is that the world economy and in particular the US economy has become much less dependent on oil. Not just because of changes in the makeup of the economy and the decline of some fuel-heavy industries and the growth of others that aren't so energy intensive but also because of changes that followed those crises in the 1970s. If you think back to the classic post-war American cars they were gas guzzlers and those just those were vanished after the oil shocks and also the world built up some really important buffers the members of the international energy agency which include the US are required to hold a certain number of days of exports in reserve to release when the time comes if there's a big shock to supply. Joe says the oil shock stands to benefit some countries more than others. The US is a net exporter of crude oil and even Iran is trying to make light of a bad situation attempting to turn the straight of hormones into a tall booth. I asked Joe how all this volatility could affect the economy. Even if the straight does reopen it's not like flicking a switch. Kick starting all of that infrastructure will take time and be expensive and in some cases the oil fills may never return to their pre-war production rates. Governments that released off in their reserves will at some point need to to replenish them and the market knows that and so you might expect higher prices for longer because there's going to be that demand in the market from government so if you take that as your starting point higher oil and gas prices for longer that effectively answers attacks on the consumers there are also interactions with the other vulnerabilities in the economy so for example do high energy prices lead to more defaults by vulnerable boroughs in the product from the private credit industry and does that need to some blow up in the financial system how does this affect the incredibly energy intensive AI industry which has been such a motive for growth but also has led to concerns about a financial bubble so yeah we'll find out. That was Wall Street Journal reporter Joe Wallace coming up the AI industry has begun to look frothy to some investors and the Wall Street firms behind private credit are under new pressures we'll dig into those after the break. You may have heard the phrase private credit more often lately it's an area of the financial system where firms raise money from investors in order to make loans to companies that have historically had a hard time getting bank loans but while the sector has been growing rapidly in recent years the Wall Street Journal's lead financial reporter Annamaria andriotis says investors are getting spooked by rising deferrals and delinquencies. Annamaria why is this happening and can you give us a sense of just how big private credit is? We are comfortably in the trillions of dollars and conservatively can say that there's roughly 1.3 trillion dollars invested in private credit in the US more than two trillion dollars worldwide but the real uptick in volume in the private credit industry really took shape from a decade ago due to a mixture of regulations that were placed on banks that basically made this type of lending even costlier and harder from a regulatory standpoint for banks to engage in and what we're now seeing is a mixture of two things. One, clear cut signs of deterioration in the quality of the loans that this industry has funded and the other red flag is that individual investors who have become a part of this equation helping to fund these loans in recent years who are freaked out. They want out but this is not a liquid industry and they're being told by private credit firms like Blue Al, the amount of requests we got for withdrawals far exceeds the 5% of the threshold that Blue Al and others have set in the industry in terms of how much they will pay out from within their funds on a quarterly basis. And you've recently reported that Blue Al capital has said investors sought to pull 5.4 billion dollars from two of its funds in the first quarter. So what happens to the companies that are using private credit if this funding stream dries up? Well, that's where there is a potential concern for some type of systemic risk because what we're looking at here are the borrowers of these loans that the private credit firms are making. Many of them are small and mid-sized businesses. By the way, many of large companies too, it's just that right now a lot of the stress is showing up more clearly in the small and mid-sized borrowers. So if that availability of credit dries up, then we're looking at what a potential for these companies to conduct layoffs, to shut down, not further expand their businesses. None of this can be good really for the economy. Simultaneously, many of these private credit firms have been borrowing from banks. So banks, many banks will say, "Oh, we're not exposed." That's not actually true. Many of these private credit firms have been borrowing from banks. So this is a very interconnected system where if things end up deteriorating, have pretty serious repercussions throughout the financial system, and maybe even the broader economy. Right now, though, that the debate is, how bad are the actual underlying fundamentals? Is this just individual investors who've realized that they don't have the appetite for this type of risk? Or is it more than that? And is it that there was an actual underlying problem? The fact is that it's not just individual investors panicking and overreacting. There are clear cut signs of loan performance within this industry that are showing cracks. The question is, how bad is this going to get? That's the journal's lead financial reporter, Ana Maria Andriotis. And that brings us to the third sector that could make or break the US economy, artificial intelligence. Since the AI boom began several years ago, Big Tech has become crucial to the economy and the stock market, and it's betting big on AI. But a lot of this is financed through debt. Angel Ow Young is our finance and tech reporter. Angel, I guess the big question is, will these bets pay off? So you've got the biggest tech companies that are spending trillions of dollars to build out data centers and buy computer chips to power the AI technology. And when you look at the data center, buildouts, how many computer chips are coming online? And you put that in the context of what's happening in the Middle East and how you've got shipping and energy constraints that will inevitably slow down the buildout of data centers and these computer chips. There seems to be a bit of a misalignment between how quickly we can get the compute to go online versus how much pent-up demand there is for AI. So to kind of put a pin in it, it's less about the concerns about whether or not this technology could do the things that these companies, like OpenAI and Anthropic are promising it can and more just about like can they provide it fast enough? It kind of depends on who you talk to. Some people say the demand is clearly there, the infrastructure is not. Others will say we're spending way too much infrastructure and we don't know how this technology is going to pan out. But if it turns out that this is not going to pan out in the way that investors and shareholders thought it would, then the shares for these companies will crash. And if these companies crash, you're talking about a huge slice of the US economy. And it's not hard to imagine that there will be trickle effects. I mean, I'm here in San Francisco. There's been so much talk in the last couple months about how this city is booming and it's all related to AI. You've got housing price of skyrocketing, you've got rental price of skyrocketing. If it turns out that this industry, the AI industry is not going to work out. You could potentially see a crash in San Francisco. So you've got the pro AI people who say this is only going to improve people's lives. This is only going to make workers more efficient. But then you've got the other side, which is this is a technology that could replace humans. And it could take away white collar jobs. So it's really hard to predict what will happen if AI were to continue on its path and continue booming. But like most industrial revolutions in the past, there will be some people who benefit greatly from it. And then there will be some people who don't. And I guess the goal is to make sure there are more people who benefit from this technology than not. That's Finance and Technology reporter Angel Al Young. And that's it for what's new Sunday for April 12th. Today's show was produced by Alexis Green with supervising producer Melanie Roy. I'm Danny Lewis and we'll be back tomorrow morning with a brand new show. Until then, thanks for listening.