AI Boom Boosts US Economy, Offering Way to Blunt War Impact

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(Bloomberg) — The AI growth engine was on full display in the first quarter, powering the US economy through fresh headwinds from a war-driven surge in inflation. 

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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. 

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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. 

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The question is whether the artificial intelligence boom can continue to pick up the slack. 

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“AI can take the baton from a GDP standpoint,” said Michael Skordeles, head of US economics at Truist. “But the consumer is critical no matter what.”

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US 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.

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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.

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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.

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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.

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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.

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‘Split-Screen Economy’

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“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.”

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The savings rate dipped in March to the lowest since late 2022, when the US was experiencing its worst bout of inflation in decades. And a widely watched measure of consumer sentiment dropped to a record low in April.

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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.