Are we there yet in the economic cycle?
Summary
- The current economic cycle in the US is characterized by AI-driven investment growth, with AI investments contributing significantly to GDP, but the cycle faces potential risks from rising interest rates and labor market constraints.
- Inflation in the US has remained above the Federal Reserve's target for six years, and a tightening labor market, exacerbated by strict immigration policies, may prompt more aggressive interest rate hikes by the Fed.
- AI investments have reached 1,500 BUSD over a 12-month period, but the sector's reliance on debt financing makes it vulnerable to interest rate increases, potentially impacting the economic cycle's longevity.
- Despite predictions of a recession being proven wrong, the US economic cycle is in a mature phase, with growth likely to continue for the next 2–4 quarters, although risks are increasing.
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Automatic translation: Originally published in Finnish 05/08/2026, 04:43 GMT. Give feedback here.
Are we there yet? The question is all too familiar from family road trips during summer vacation, but it is increasingly on investors' minds regarding the current economic cycle. A good reminder is that a cycle never dies of old age, but rather from structural problems. In the US, attention is turning to the labor market and artificial intelligence in this regard.
The current economic cycle is strange. It began with the overheating of the pandemic era, cooled slightly with interest rate hikes, continued with a small easing of monetary policy, and has since been fueled by AI investments. It is worth remembering that historically, business cycles have not died of old age, but have ended either due to internal macroeconomic imbalances or because the central bank "murders" them with interest rate hikes to curb inflation. In the United States, inflation has remained above the Fed's target for six years. Until now, authorities have been able to rely on explanations that expect inflation to slow as the labor market cools. However, the situation is turning: the slowdown in inflation is stalling, but at the same time, the labor market is showing new signs of tightening. For example, strict immigration policies limit the supply of labor, which could ultimately lead to the Fed raising interest rates more aggressively than market expectations within the next year. If interest rate hikes begin, it could signal the end of the economic cycle.
US: Policy rate and recessions
Source: LSEG
The biggest imbalance in the current cycle is the AI-related investment boom. For example, the WSJ recently reported that one-third of US economic growth comes purely from AI investments. Investments in software, hardware, and data centers reached BUSD 1,500 over 12 months, up from around BUSD 1,000 two years ago. Construction investments have also increased by a third due to the data center boom, which is directly reflected in GDP figures.
Source: TS Lombard
While the potential of AI is significant, its productivity benefits may not materialize quickly enough to prevent the economic cycle from ending. In addition, large technology companies have increasingly begun to finance their investments with debt as free cash flow dwindles. This makes the AI sector vulnerable to rising interest rates. Those who predicted a US economic recession have recently been proven wrong, but the economic cycle appears to have been in a mature phase for some time. The economy could very well continue to grow for the next 2–4 quarters, but risks are also increasing.
Source: TS Lombard
