The AI growth engine was on full display in the first quarter, powering the U.S. economy through fresh headwinds from a war-driven surge in inflation.
The conflict in the Middle East has sent oil prices soaring, disrupted global supply chains and injected uncertainty into the outlook. Even so, weary consumers — who have historically served as the primary engine of economic growth — have continued to spend.
Tax refunds have helped, as have limited layoffs across the economy. But Americans are increasingly saving less to keep up with the high cost of living. With gasoline prices already at the highest since 2022, and still rising, consumers are vulnerable.
The question is whether the artificial intelligence boom can continue to pick up the slack.
“AI can take the baton from a GDP standpoint,” said Michael Skordeles, head of U.S. economics at Truist. “But the consumer is critical no matter what.”
U.S. gross domestic product rose an annualized 2% in the first three months of the year, accelerating from weakness in the prior period driven by the longest-ever federal government shutdown. Consumer spending growth slowed slightly, but still rose at a better-than-expected 1.6% rate.
Business investment, however, showed just how much heavy lifting it can do for the economy. Business outlays on equipment and structures advanced 10.4%, the fastest pace in almost three years. Information processing equipment and software both posted outsized gains.
Looking ahead, tech giants like Alphabet Inc., Amazon.com Inc., Meta Platforms Inc. and Microsoft Corp. are expecting to plow hundreds of billions into AI this year. But the outlook for American households depends in large part on how the war in Iran develops.
Many economists see a risk of a further cooling in consumer spending. Tax refunds have helped cushion the initial blow, but rising transportation costs may well trickle down to goods prices. And a disruption in the supply of fertilizer risks leading to higher grocery bills over time.
As Americans devote more of their income to food and gasoline over the coming months, that will leave less for discretionary purchases, said Wells Fargo & Co. economist Shannon Grein.
‘Split-Screen Economy’
“This is a split-screen economy,” said Heather Long, chief economist at Navy Federal Credit Union. “AI is doing well and the middle class is squeezed.”
The savings rate dipped in March to the lowest since late 2022, when the U.S. was experiencing its worst bout of inflation in decades. And a widely watched measure of consumer sentiment dropped to a record low in April.
Job opportunities have dried up across much of the economy, contributing to the malaise. Thankfully, though, the unemployment rate appears to have stabilized and applications for unemployment insurance dropped last week to levels not seen since the late 1960s.
Even so, high-profile corporations have announced plans to reduce their workforce in recent months — and in some cases have cited AI as part of the reasoning — leaving many households on edge.
“It seems to be more of a business-driven recovery, which maybe is why the average person may not feel the economy is growing the same way as a more traditional consumer-led recovery,” said Skordeles.
Early company earnings reports show that in the first quarter, U.S. households were still spending but showing signs of strain. Kimberly-Clark Corp. and Procter & Gamble Co. both said that they haven’t seen significant shifts in buying behavior, though executives emphasized that shoppers are already stretched after years of inflation and increasingly focused on value.
The bigger impact so far is coming through higher energy costs. The Federal Reserve’s preferred measure of inflation — the personal consumption expenditures price index — rose 0.7% last month, the most since 2022.
Price Pressures
Companies across industries said elevated oil prices tied to the war in Iran have lifted expenses, from raw materials to transportation.
Airlines including JetBlue Airways Corp. and United Airlines Holdings Inc. say they’ve so far been able to raise fares and recoup at least some of the higher fuel costs without significantly denting bookings, pointing to pockets of resilience. Still, United warned that the longer prices remain elevated, the more likely demand will decrease.
Other companies are absorbing the costs for as long as they can to hold on to customers.
Paul Altieri, chief executive officer of the watch retailer Bob’s Watches, said his company already spends more than $1 million in shipping costs a year as his business heavily operates online.
“If we start adding a surcharge or go up in prices to reflect increased transportation, FedEx fuel charges, we’ll lose the customer,” Altieri said. “We’ll lose the sale.”
Even if American consumers grow more guarded, continued investment in AI could help provide some breathing room for the economy until geopolitical and inflation risks abate.
“The issue with the AI build-out is that it’s not going to last forever,” said Stephen Stanley, chief U.S. economist at Santander U.S. Capital Markets LLC. But “it doesn’t feel like we’re anywhere close to the end.”
Saraiva, Dillard and Fanzeres write for Bloomberg.
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