AI investment remains strong, but feels uneven to most Americans

Note: As always, we published a separate note regarding the Federal Reserve (Fed) meeting on October 28^th.

Trend watch

After decline for a few weeks, households are facing renewed pressure from rising fuel costs (see slide 7, available to clients on the full report). The declines in U.S. gasoline and diesel prices were mostly due to temporary rollbacks in fuel taxes in roughly a third of states. That’s stretching household budgets and likely contributing to ongoing consumer angst, which has been reflected in sour consumer sentiment readings for months.

Our take

Despite the headwinds from higher fuel prices and interest rates, the U.S. economy continues to plod through, which has been reinforced by the latest batch of economic data.

Growth of gross domestic product (GDP) accelerated to 3.4% during the third quarter from 2.5% and 2.2% in the first and second quarters, respectively. Other major indicators also point toward continued expansion, suggesting that higher borrowing costs and elevated energy prices have yet to derail the broader economy. Durable goods orders reinforced that message, surging on aircraft demand while core orders (excluding aircraft and defense) remained strong at a fresh all-time high.

One increasingly important source of that resilience is the artificial intelligence (AI) investment boom. AI-related technology spending has emerged as a significant growth engine, helping lift business investment and overall economic activity. The impact appears even more pronounced in nominal terms, with nominal GDP—meaning not adjusted for inflation—expanding significantly faster than its prior trend as AI investment adds another powerful source of spending to the economy. This strength helps explain why growth has remained strong despite restrictive monetary policy by the Fed and higher fuel costs. It also helps explain why the growth feels uneven for most Americans.

The challenge is that strong growth is arriving alongside persistent inflation. The Fed's preferred inflation gauge increased again in September, extending a run of inflation above the central bank's target to five full years. That combination leaves policymakers in a difficult position: the economy continues to grow, AI investment is providing a meaningful tailwind, and core business spending remains healthy, but inflation has yet to return to target and rising energy prices are creating another near-term hurdle. For now, the U.S. economy continues to power ahead, but the combination of higher fuel prices, sticky inflation and restrictive interest rates is likely to keep both consumers and the Fed uneasy.

Bottom line

The U.S. economy continues to power ahead, fueled by solid underlying demand and an AI-driven investment boom. But sticky inflation and higher energy prices are keeping the Fed on guard, setting the stage for another potential rate hike and continued market volatility.