Why the productivity gains from AI won't be able to prevent a recession

• AI may be powering the stock market higher but it won't stop a recession, David Rosenberg said.
• AI can't change the fact that businesses are about to face a debt-refinancing shock.

As the artificial intelligence-powered stock market rally pushes on, proponents of the technology have posited that it could help ward off a recession that forecasters are calling for.

According to David Rosenberg, economist and president of Rosenberg Research, don't get your hopes up. AI won't change the trajectory of the business cycle enough to prevent a downturn.

"As powerful as the AI theme is, it is not big enough to prevent the economy from entering a recession, as the business sector, in particular, undergoes the mother of all refinancing cycles at interest rates that promise to be 300 basis points above the borrowing cost at the time of origination," Rosenberg said in a note on Friday.

Simply put, AI can't do anything to alleviate the shock set to ripple through US companies that have to fund themselves with debt at much higher interest rates.

It may very well be the case that the game-changing tech will bring about a sustained productivity surge, propelled by large-scale capital investment and investor euphoria. However, similar advancements that were touted for their massive boost to productivity have never managed to reshape the dynamics of the business cycle, and history proves this, Rosenberg said.

In the late 1960s and early 1970s, companies like American Micro Devices, Intel, and IMB kicked off a computing boom that boosted productivity far beyond its annual rate.

"But guess what? We had two recessions separated three years apart. The economy still felt the heat from the damage the Fed had already done from a policy-tightening standpoint, lags and all," Rosenberg wrote.

The bursting of the tech bubble that formed in the late 1990s also resulted in a hard landing for markets and the economy despite the transformative power promised at the time by the early internet.

"Let's also keep in mind that, while technology commands a 30% share of the S&P 500 market cap, the sector's GDP share is far lower at 7%. The stock market is not the economy," Rosenberg added.