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Good Friday charts: Feed it forward
Professor Michael Mainelli repurposes a concept from engineering — feed-forward loops — to explain how perceptions in business and finance sometimes become reality.
He begins with a parable about a hot dog stand that’s such a success its owner has the money to make a fatal mistake: sending his son to Harvard.
This man ran one of the finest hot dog stands in the whole city and, strangely for a hot dog stand, he even used real meat in his sausages. People came from miles around to get tasty hot dogs that were freely covered in onions and sauces. In fact, the man was so successful that he could afford to send his son to Harvard. His son even went on to finish an MBA. After graduation the son came back to work with his dad. “Dad,” he said, “based on the current economic statistics, we’re heading for a recession. You’ve got to stop using all that sauce, and you dish out onions as if they were free.” The father was torn. He’d always been generous to his customers, but his very bright boy didn’t get all that education for nothing. So, reluctantly, he cut back on the sauces and the onions. His son moved him to buying a cheaper brand of hot dog with a more traditional sawdust ratio. It was just in time, because it turned out his son was right — his business took a real dive.
The moral of the story, of course, is that in business and finance, expectations can sometimes be self-fulfilling.
Something similar seems to be happening in technology.
This week, Oracle reportedly eliminated as many as 30,000 jobs — roughly 18% of its workforce. Management did not say what motivated the cuts, but they’re widely attributed to the belief that AI makes humans so much more productive that companies need fewer of them.
By one estimate, 100,000 jobs have been cut in the name of AI productivity so far this year.
The most extreme example is Block, which laid off 40% of its workforce because CEO Jack Dorsey believes AI lets them do more with less: “A significantly smaller team using the [AI] tools we’re building can do more and do it better,” he explained.
Recent research suggests this may be more perception than reality.
An NBER study on AI in the workplace concluded that “perceived productivity gains are larger than measured productivity gains.”
Similarly, The Wall Street Journal reported that “AI Isn’t Lightening Workloads. It’s Making Them More Intense.” (AI clearly replaced the work of writing that headline, however.)
Even the top purveyor of AI coding tools, Anthropic, can’t entirely vouch for their benefits: “We find that AI use impairs conceptual understanding, code reading, and debugging abilities, without delivering significant efficiency gains on average,” they wrote in a recent report.
This could change, of course — especially if people believe that it will. Oracle, for example, is taking the savings from its layoffs and reinvesting them in the development of AI. This raises the odds that the perception of AI productivity could soon become reality.
In other words, Oracle is feeding money forward to turn AI into what tech CEOs believe it already is.
If successful, they will have manifested the change they saw coming.
If not, they may have ruined a perfectly good hot dog stand.
Let’s check the charts.
US tech employment:
This morning’s US jobs data was better than expected, but Joseph Politano notes that the US tech sector has lost 43,000 jobs over the past year.
The good news:
An estimated 83.8% of the prime-age US population was gainfully employed in March, just below the all-time high of 84.4% from the halcyon days of 1999.
The kids are alright?
The unemployment rate for 20-24 year-olds ticked down to 6.4% in March, near multi-decade lows.
Even the tech kids?
Per Callum Williams of The Economist, BLS data shows that young tech workers have the same unemployment rate as for tech workers overall — and below the rate for all workers. This, he says, suggests that “entry-level jobs in tech are no longer hard to find.”
Employment canaries:
Torston Slok notes that “there are no signs of AI replacing offshore workers” in the Philippines or India. If AI was productive enough to cause unemployment, it should happen there first.
Definitely not AI:
Economist Mike Konczal reports that employment in sectors least exposed to AI has fallen far below trend over the past two years.
Market signals:
Data from Meritech details the huge divergence between the performance of AI stocks and software stocks. This is the market’s way of telling companies to invest more in AI.
Behind schedule, already:
Bloomberg reports that “almost half of the US data centers planned for this year are expected to be delayed or canceled.” Along with supply problems caused by the war in Iran, The Atlantic thinks this is setting us up for “a multidimensional economic disaster.”
OpenAI valuation:
Despite a massive capital raise this week, OpenAI is reportedly falling out of favor with investors. Bloomberg reports that, in some cases, the secondary shares are “becoming almost impossible to unload." Futures on the perpetuals exchange Ventuals have been trending lower — though at an implied valuation of $900 billion, they still trade above the $852 billion at which the raise was priced.
More importantly, OpenAI raised an astonishing $122 billion this week — all of which will be fed-forward into making AI as productive as people think it is.
Have a great weekend, hot-dog readers.
— Byron Gilliam
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