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

0:00That's pure automotive joy. I'm Peter, the owner of Muscle Car Junior. It started as a hobby, then I started posting about it. Before I knew it, I built a business restoring muscle cars on Facebook Marketplace and the community of car lovers on Instagram. Today, new customers send me WhatsApp messages from all over. Not bad for a hobby. Learn how Meta helps over 35 million American businesses like Peter's grow at meta.com slash community. 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.

0:43On today's show, the U.S. 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 war's 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.

1:28It'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.

2:13If you think back to the classic post-war American cars, they were gas guzzlers and those just 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 U.S., 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 U.S. is a net exporter of crude oil, and even Iran is trying to make light of a bad situation, attempting to turn the Strait of Hormuz into a toll booth.

2:47I asked Joe how all this volatility could affect the economy. even if the strait 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 fields may never return to their pre-war production rates governments that release oil from 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 How does your starting point, higher oil and gas prices for longer?

3:21That effectively acts as a tax on 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 borrowers from the private credit industry? And does that lead to some blow up in the financial system? How does this affect the incredibly energy intensive AI industry, which has been such a motor 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.

3:58We'll dig into those.

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4:38You 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, Anna Maria Andriotis, says investors are getting spooked by rising deferrals and delinquencies. Anna Maria, 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 invested in private credit in the US, more than$2 trillion worldwide.

5:24But 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.

6:13And they're being told by private credit firms like Blue Owl, the amount of requests we got for withdrawals far exceeds the 5 % of the threshold that Blue Owl 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 Owl Capital has said investors sought to pull$5.4 billion 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.

7:01Many of them are small and mid-sized businesses. By the way, many are 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, right? 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.

7:42So this is a very interconnected system where if things end up deteriorating, have pretty serious repercussions throughout the financial system and maybe even in the broader economy. Right now, though, 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.

8:24The question is, how bad is this going to get? That's the journal's lead financial reporter, Anna Maria Andriotis.

8:36And that brings us to the third sector that could make or break the U.S. 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 Ao 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.

9:40So 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, you know, 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 on 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.

10:25And if these companies crash, you're talking about a huge slice of the U.S. 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 prices skyrocketing. You've got rental prices 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.

11:12But 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 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 News Sunday for April 12th. Today's show was produced by Alexis Green with supervising producer Melanie Roy.

11:59I'm Danny Lewis, and we'll be back tomorrow morning with a brand new show. Until then, thanks for listening.

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