But mob with the job is not as heat soars on private credit, AI data centers
(Originally published July 3 in “What in the World“) America’s 250th is going to be a hot one.
The U.S. east coast is experiencing temperatures above 38°C ahead of the U.S. semiquincentennial. The heat wave is made more dangerous by the fact that nightfall is offering little relief: the mercury is staying above 24°C through the night. Thanks to climate change, nighttime U.S. temperatures are rising faster than daytime temperatures.
The country’s largest power grid expects electricity demand to rise to surpass a daily record that has stood for 20 years. Higher demand for air-conditioning to combat rising temperatures is competing with the growing drain imposed by data centers for AI, pushing wholesale electricity prices in New England up more than 240% and creating shortages that on Thursday left more than 150,000 households without power. The Energy Dept. this week ordered grid operators to force data centers to switch to their backup power systems.
But when the thermometer goes way up and the weather is sizzling hot, the mob with the job is not. The U.S. Labor Dept. reported Thursday that the economy created 57,000 new non-farm jobs in June, slightly less than half what economists expected. At the same, the labor force shrank slightly. That helped pull the unemployment rate down to 4.2% from 4.4% a year ago. But it also meant that the labor participation rate—the number of Americans either working or looking for work—edged down to 61.5% from 61.9%.
On the bright side, the dour jobs data doused expectations that the U.S. Federal Reserve would raise rates in September, as it balances protecting jobs against battling inflation. Investors now don’t expect the Fed to raise rates until October. That soupçon of “good” news helped the stock market offset a sell-off in AI-related stocks, with the S&P500 ending Thursday flat.
The sudden swoon in tech stocks is sending shock waves through the market’s darker corners as investors look to reel in their riskiest bets. One of the darkest corners, regular readers will recall, is the market for private credit. There, the cockroaches are fleeing as fast as they can: Investors tried to withdraw $15.6 billion from private-credit funds in the second quarter of 2026, up from the roughly $13.9 billion in the first quarter, with one big private lender, Blue Owl Capital, saying it received requests to withdraw as much as 38% of the assets in one of its funds focused on software and technology.
Private credit companies, faced with this riptide of withdrawals, have conveniently capped them. As a result, private credit fund managers returned only $5.9 billion to investors, resulting in a rising gap between how much investors want to yank out and how much they’re yanking.
The private credit mess reeks of contagion. Private lenders who lose capital will need to reel in credit, tightening real borrowing costs for borrowers and potentially forcing many into default. And investors who can’t cash out of their private credit funds may run into liquidity constraints themselves. Losing money on private loans also threatens investments in other markets, including the old-fashioned market for bank loans. Moody’s estimates that banks have lent $1.4 trillion to private credit lenders.
Regular readers will recall that the International Monetary Fund raised the alarm last fall about the rapid growth in private credit:
“The IMF has recently raised new warnings about the risks to the financial system posed by the expansion of financing beyond traditional banks, saying that authorities should expand oversight of credit funds, hedge funds, and private equity. The IMF said banks in the US and Europe have a $4.5 trillion in loans to these non-bank financial institutions, representing 9% of their total loan book. The logic of private lending—in other words, loans made without the transparency of a bond offering or the scrutiny of a conventional bank—is that corporate lenders know business, so who better to assess whether a business can repay them? But assessing risk is what banks do, using models to assess not just the risk of an individual business repaying, but how broader industry and economic trends may affect that business and the many other borrowers the bank has. That’s why the IMF has been so concerned about the shift in credit away from banks after global regulators moved to clip their wings after the global financial crisis. Not only do non-bank lenders like pension funds and private equity firms not have the same understanding of systemic risk that banks are supposed to have developed (and still screw up even so), but they don’t have banks’ complex methods of ensuring that they remain solvent should that risk throw one or even dozens of their borrowers into default.”