The AI Boom Is Driving GDP Growth

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Alex Ossola (0:18)

First quarter GDP gets a big boost from business spending.

Gregory Daco (0:22)

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

Alex Ossola (0:28)

And the US 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 Ossola 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 Daco, 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? What do we know about how people are spending now?

Gregory Daco (1:26)

I think in general, people are being increasingly cautious. We are in this environment where income growth is decelerating and inflation is accelerating. 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.

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.

Alex Ossola (1:56)

Since the end of February when the Iran War started, gas prices have increased 44 percent. Does that mean that we're going to be seeing even more pressure on consumer spending moving forward?

Gregory Daco (2:06)

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.

Alex Ossola (2:42)

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?

Gregory Daco (2:52)

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.

Alex Ossola (3:25)

Are there risks to the economy to have so much spending concentrated in one area?

Gregory Daco (3:30)

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

Alex Ossola (4:01)

That was Greg Daco, Chief Economist at EY-Parthenon. Thanks, Greg.

Gregory Daco (4:05)

Thank you.

Alex Ossola (4:05)

With the latest GDP numbers comes a sort of scary sounding milestone. The US national debt now exceeds 100% of gross domestic product. The government is spending $1.33 for every dollar it collects in revenue.

It's not the first time the debt's topped GDP, and that number might bounce around a bit. There also isn't some special level where debt goes from problematic to catastrophic, but it is a symbol of the fiscal stresses on the US that have been building for decades. Investing columnist Spencer Jakab says the debt is already weighing on the government's budget.