AI Will Have Big Effect on US Economy by 2027, Goldman Says

The American artificial intelligence industry is far ahead of the rest of the world, it notes, and you don’t have to worry about Skynet from “The Terminator.”

When will artificial intelligence become a big important factor in economic life? It will have a measurable impact on the domestic economy in four years, with the rest of the world trailing because the U.S. is the leader in AI, according to a report by Goldman Sachs researchers.

The U.S. would benefit the most, as it leads the world in AI innovation, the study observed. Indeed, a Stanford University study found that, in 2022, the U.S had the largest number of AI companies, at 542, followed by China at 160 and the U.K. at 99.

AI will spur increased automation, covering 25% of labor tasks in developed economies and 10% to 20% in emerging markets, wrote Goldman economists Joseph Briggs and Devesh Kodnani.

Will it be a job killer? Not much of one, Goldman concluded. “We expect this automation to drive labor cost savings and free up workers’ time, some of which will likely be allocated to new tasks,” Briggs and Kodnani wrote, by leaving more menial tasks to machines and making humans more productive at other important work.

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Annual increases in U.S. gross domestic product are projected to be 0.4 percentage points over the next 10 years, outpacing an average of 0.3 for other developed markets and 0.2 for emerging markets, they calculated. According to the report, areas that will benefit the most are health care (in particular, drug discovery), cybersecurity, design and software development.

What about the threat that AI could take over from people, as in the “Terminator” movies, in which an evil master cyber-brain, Skynet, wiped out most of humanity and sent cyborgs to destroy the rest? Not happening, nor will anything close, Goldman decided. Predictions that AI will grow into a super intelligence, a la Skynet, are “very premature, especially given the well-documented limitations of current AI models,” Briggs and Kodnani declared.

The report also predicted that AI could boost worldwide GDP by 15% over the next 10 years, a doubling of Goldman’s previous forecast earlier this year. Nonetheless, the report acknowledged that the 15% estimate could be on the high side, as technology-driven growth sometimes slows as it gets widely adopted.

This increase in the world’s economy will take time to emerge, Goldman indicated. Surveys of businesses and executives show they anticipate AI usage and AI-related hiring to really start kicking three years from now.

AI has shown a steady advance in adoption by corporations, which has increased with recent advances in the field. Globally, the proportion of companies adopting AI more than doubled from 2017 to 2022, with 22% now saying they have included some form in their workplaces, per McKinsey & Co.’s annual research survey.

Not Just a Label

“How do people really understand this?” Treichel asked. “It’s really hard, because a lot of times, I’ll ask the question about ESG and an investment lineup, and the perspective that I hear is, ‘Well, if it doesn’t say ESG in the title of the fund, or if it’s not named that, or if it doesn’t say sustainable, then we don’t have ESG in our lineup.’”

Treichel continued to say that true ESG integration, defined by the CFA Institute as ongoing consideration within an investment analysis and decisionmaking process with the aim to improve risk-adjusted returns, requires more knowledge about a fund or strategy than its title to avoid “greenwashing.”

“Distinguishing between something that has been greenwashed versus what has actual signs of integration really takes rolling up their sleeves and doing the work,” said Treichel. “I think that is really one of the big problems.” It is key to have “access to the tools and resources to be able to get the real issue,” she added.

Sustainable Stock Picking

When it comes to broad equity market investing, ESG stocks are also difficult to define and benchmark, said Witold Henisz, the vice dean and faculty director of the ESG Initiative at the University of Pennsylvania’s Wharton School. But that is not necessarily uncommon in the world of equities.

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“It’s very hard to ascertain what is an ESG stock in the same way as it is hard to ascertain what is the value stock, what is the growth stock,” Henisz said.

The lines get no clearer when it comes to performance of stocks that include ESG factors, which, again, is not necessarily any different from the rest of the market.

Henisz pointed out that research shows no on-average benefit to using an ESG strategy—but that can also be said for many other strategies, as no criteria consistently outperforms the market.

No one can provide “the formula that would help you pick the stocks that would outperform the market over the next five or 10 years—it doesn’t exist,” Henisz said. “Sometimes [it is] value stocks, sometimes growth stocks, sometimes the big industrials, sometimes the emerging markets. ESG is an overlay on top of each of those investment strategies that should allow them to do better.”

Henisz provided the example of the current Russia-Ukraine and Israel-Hamas wars. Fossil fuel stocks are going to outperform, and during that time, ESG stocks, which tend to be more environmentally considerate companies, are going to underperform.

“ESG strategies clearly don’t underperform the market,” Henisz said. “Under some periods, under some strategies, ESG strategies are going to outperform the market, and there are plenty of studies that show that for certain industries, certain years and certain datasets. Would you ever want to take that ability away?”

Henisz concluded that definitions and standards will be key to navigating the future ESG landscape: “We need to have more regulation to root out greenwash and really set a standard that if you’re going to say you’re doing ESG integration, you’ve got to meet these criteria.”

Tags: environmental social and governance investing, Greenwashing, Public Equity