The AI crocodile

Today’s chart comes from Octavian Adrian Tănase. Historically, productivity in the US financial sector moved broadly in line with labour demand: when margins were under pressure in a zero-rate world, efficiency was the name of the game, and headcount tended to follow activity.

Since 2022, with the return of interest rates, that relationship has broken down. Profitability (value added) has increased meaningfully, while labour demand has not kept up. Two forces seem to be at work: first, banks are choosing to keep the efficiency gains instead of rehiring; second, automation and AI are increasingly replacing administrative and back-office tasks. Finance is data-heavy and rules-based, which makes it a natural candidate for this kind of productivity leap.

In short: supportive for bank shareholders, much less so for employees.