Photo credit: Harri P
Chances are many of you have checked your stock portfolio or 401(k) lately. Even after last week’s rather substantial decline, it’s probably worth a lot more than it was two years ago, thanks to the global AI boom (bubble?). You might now wonder what stocks have to do with the labor market. Well, probably more than you think! While the stock market isn’t the economy, it’s also not NOT the economy: equity wealth supports consumer spending and business investment, both of which in turn affect job growth.
In this piece, we show to what extent stock prices have boosted GDP and job creation. And the channel also works in reverse. If the AI economy blows up, a serious stock market crash could cause a recession.
An unprecedented equity boom, fueled by AI
The total market capitalization of the Nasdaq and New York Stock Exchange, which account for nearly all U.S. stock-market value, recently reached a record high of almost $80 trillion. Foreigners own a big slice of U.S. stocks, but American households still hold a total of $74 trillion in equities (U.S. and foreign). This represents an increase of about $24 trillion since the first quarter of 2024, or about 48% in just over two years.
How much of that is driven by the AI economy? Hard to say. Estimates vary, but some analysts think most of it: One report suggests that just 42 artificial intelligence stocks have contributed about 67% of the price increase of the S&P 500. They have also accounted for about 58% of the index’s earnings growth and a stunning 81% of the growth in capital expenditure. We truly live in an economy that is being shaped by this technological cycle.
Growth is driven by the American consumer
But even with all of today’s investment spending going into data centers, energy, and chips, household consumption still accounts for most of economic output. There have been some big fluctuations since 2020 — spending plummeted during the pandemic only to come back soaring when the economy opened up again — but over the economic cycle, about two-thirds of total GDP results from consumer spending.
So why do the asset price gains matter for the economy? Well, economic research shows that household consumption is partly driven by wealth.
While the effect is not enormous, it does influence the economic cycle. A $1 increase in wealth typically leads to about 5 cents of additional spending. By that metric, the $24 trillion boom since 2024 could potentially create an additional $1.2 trillion in household consumption. Research shows, though, that households react with a lag. Asset prices move first; consumers start spending several quarters later. Because much of the boom is recent — about 40% of the gain occurred this year — it is reasonable to assume that only 50% to 60% of the consumption boost has arrived so far. Even then, this implies that consumer spending is now running about $600 billion higher on an annual basis than otherwise, an increase of roughly $300 billion a year over the past two years. Fed research shows that about 10% of that spending typically leaks abroad via imports. This means that the stock boom lifted U.S. output by about $270 billion each year, adding roughly 0.85 percentage points to nominal GDP growth in a $32 trillion economy. Since some of that extra demand simply pushes up prices, the boost to real GDP growth is smaller — a fair assumption is about half, or 0.4 to 0.5 percentage points per year.
What does this mean for the labor market?
Here is where it gets even trickier. The relationship between real GDP growth and employment growth is somewhat unstable — it probably depends on where you are in the economic cycle. A simple rule-of-thumb called Okun’s law suggests that the 0.9-percentage-point contribution to real GDP growth over two years reduced the unemployment rate by about 0.4 percentage points in total. With a labor force of about 170 million, that means an additional 600,000 jobs, or 300,000 annually.
Explainer: This graph plots the relationship between real GDP growth and the unemployment rate. The slope indicates that each additional percentage point of real GDP growth lowers the unemployment rate by roughly 0.4 percentage points.
Since the summer of 2024, the U.S. economy added about 1.35 million payroll jobs. Accordingly, about 45% of job creation (+600,000) can be attributed to the equity boom, with the price gains of AI stocks accounting for roughly one-third of the total (+400,000).
The wealth effect also helps resolve another puzzle. Consumption has been holding up well even as inflation-adjusted wage growth has turned negative because of surging oil prices. U.S. consumers are obviously feeling the pinch, but not enough to stop shopping: They are spending out of wealth and not just income.
What goes up can also come down — duh!
Unfortunately, what is true on the way up is also true on the way down. A stock market crash could severely harm economic growth, causing substantial job losses across all sectors as consumer spending dries up. It would also create negative spillover effects for the rest of the world. If the U.S. consumer sneezes, the global economy catches a cold. A 25% to 30% drop in equities might be sufficient to undo the growth boom and erase its job growth. For context: during the Great Recession, equity markets fell by more than 50%.
To be crystal clear, we do not in any way forecast that this will happen; we only note that it might. Furthermore, any downside scenario needs to consider how policymakers would react. While high public debt limits the scope for a fiscal response, monetary policy can prevent a severe recession arising from a stock market crash by aggressively lowering interest rates and injecting money into the economy.
What does this mean for recruiters?
Our back-of-the-envelope calculations suggest that the stock market boom has contributed significantly to both GDP growth and job creation since early 2024. The AI economy is not just about building data centers and AI-related infrastructure en masse; it’s also propping up consumer spending via the wealth effect. Through those two channels combined, the U.S. economy is now highly reliant on AI. This has important implications going forward. A bursting bubble could substantially lower growth, cause a severe job contraction, and risk plunging the economy into recession. This is probably why the Bank of England is considering adding such a scenario to its next stress test, and I would be very surprised if people at the Fed weren’t thinking about the same issue.
For recruiters, this means the boom has supported more of your organization’s hiring than you may realize, as household consumption supports every sector in the economy, from transportation and hospitality to retail. The flip side is that, in the event of a stock market downturn, recruitment in your organization could also freeze more quickly than you might anticipate.