AI and Consumers Power Growth Despite Headwinds

Wars in Ukraine and the Middle East, higher tariffs and persistent inflation continue to constrain U.S. growth by diverting resources from domestic consumption and investment, raising production costs and reducing purchasing power. Nevertheless, the economy has remained resilient in 2026, supported by consumer spending and investment in artificial intelligence (AI).

Real GDP grew at annualized rates of 2.5% in the first quarter and 2.2% in the second. Recent data suggest growth of at least 3.0% in the third quarter and roughly 2.5% in the fourth, putting annual growth near 2.4%. Labor conditions remain stable: unemployment fell from 4.4% in February to 4.2% in September, while weekly initial unemployment claims hovered around 200,000. A record stock market has supported spending, although inflation has prompted households to save less and borrow more. Real consumer spending rose at annualized rates of 0.7% and 3.8% in the first two quarters; annual growth could reach 2.3%.

Consumers account for slightly more than two-thirds of economic output, but AI investment is providing an additional lift. Expectations of productivity gains and new products and services have fueled spending on software, hardware and structures. Business fixed investment grew at annualized rates of 9.9% and 9.0% in the first two quarters, adding 1.36 and 1.25 percentage points to GDP growth, respectively. Annual investment growth could approach 8.0%, with major developers’ and suppliers’ plans suggesting similar gains in 2027.

These growth engines face risks. The AI investment boom will eventually subside, but its timing and pace remain uncertain. Major companies are profitable, yet rising capital expenditures are reducing free cash flow and increasing reliance on borrowing. Higher financing costs and capital-goods prices could squeeze returns. Orders for durable goods associated with data center construction have already flattened. Investment growth may moderate in 2027; an outright decline could weaken profits and stock prices, reducing household wealth and spending.

Consumer demand is also vulnerable to higher energy prices caused by war. Damage to refineries can restrict gasoline and diesel supplies, increasing transportation costs and prices throughout the economy. Persistent inflation could prompt further Federal Reserve interest-rate increases, slowing consumer purchases and business investment. Continued resilience therefore depends on both spending engines holding up as these pressures evolve over time.