Greg Daco

We have firms that are extremely focused on AI investment, and they're driving most of the momentum.

I think in general, people are being increasingly cautious.

We are in this environment where income growth is decelerating and inflation is accelerating.

So spending power is diminishing, and that is increasingly a restraint on consumer spending activity.

The encouraging thing is that we have a bifurcated consumer landscape.

So affluent consumers are still doing their fair share of spending, but lower to median income households are increasingly struggling in the face of these headwinds.

And as a result, they're spending at a slower clip.

we are going to continue to see the pressures from the middle east conflict affect consumer spending in a negative way now in the first quarter we were encouraged by the fact that we had higher than usual tax refunds coming from the one big beautiful bill but those were largely offset by the higher cost of gasoline and they will continue to be offset by these higher prices and we're going to see these higher energy prices filter through to transportation costs

filter through to airfare and also filter through to higher food prices.

The inflation landscape is going to be more restrictive in terms of consumer spending capacity.

We have essentially a bifurcated landscape when it comes to business investment.

We have firms that are extremely focused on AI investment, and they're driving most of the momentum.

In fact, if you look at the GDP data for the first quarter, you saw that there was a surge in business equipment spending on info and processing equipment,

as well as a surge in intellectual property products.

That's R&D, that's software investment, and that is all tied to AI.

And those were the major factors that were driving business investment and, in turn, GDP activity.

It is a risk, and I have spoken in the past about the three fragile A pillars of growth, affluent consumers, AI investment, and asset price appreciation.

When you have three narrow pillars of growth, it is encouraging when you have a virtuous cycle, but if there is a shock to one of these pillars, it will expose underlying fragilities in terms of economic momentum.

Outside of AI, we're seeing more hesitation when it comes to investing, when it comes to hiring, and that is curbing the underlying potential for growth in terms of private sector activity.

Thank you.