The AI Boom Is Driving GDP Growth
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What are the latest GDP growth figures and their implications?
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First quarter GDP gets a big boost from business spending.
We have firms that are extremely focused on AI investment, and they're driving most of the momentum.
And the U.S. national debt now exceeds GDP, a once unthinkable threshold. Plus, the House approves a bill to fund most of the Department of Homeland Security, but not ICE. It's Thursday, April 30th. I'm Alex Zosola for The Wall Street Journal. This is the PM edition of What's News, the top headlines and business stories that move the world today. A new piece of important economic data came in today, GDP. It rose at a 2% rate in the first quarter. That's better than the half a percent from the end of last year when government shutdown was a big drag. But the first quarter was still a bit lower than economists expected. To dig into what's behind the numbers, I'm joined now by Greg Dacko, chief economist at EY Parthenon.
Greg, the economy's main engine, of course, is consumer spending. That softened in the first quarter to 1.6% from 1.9% in the fourth quarter. What's driving those changes and what do we know about how people are spending now?
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.
since the end of February when the Iran war started, gas prices have increased 44%. Does that mean that we're going to be seeing even more pressure on consumer spending moving forward?
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.
How is AI investment impacting business spending and GDP growth?
One of the other things we saw in the numbers today was that business spending picked up a lot during the quarter. It rose more than 10 percent. What kind of businesses are doing that spending and what are they spending on?
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.
Are there risks to the economy to have so much spending concentrated in one area?
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.
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