America's future could hinge on whether AI slightly disappoints

Summary

A burning question that’s on a lot of people’s minds right now is: Why is the U.S. economy still holding up? The manufacturing industry is hurting badly from Trump’s tariffs, the payroll numbers are looking weak, and consumer sentiment is at Great Recession levels: And yet despite those warning signs, there has been nothing even remotely resembling an economic crash yet. Unemployment is rising a little bit but still extremely low, while the prime-age employment rate — my favorite single indicator of the health of the labor market — is still near all-time highs. The New York Fed’s GDP nowcast thinks that GDP growth is currently running at a little over 2%, while the Atlanta Fed’s nowcast puts it even higher. One possibility is that everything is just fine with the economy — that Trump’s tariffs aren’t actually that high because of all the exemptions, and/or that economists are exaggerating the negative effects of tariffs in the first place. Weak consumer confidence could be a partisan “vibecession”, payroll slowdown could be from illegal immigrants being deported or leaving en masse, and manufacturing’s woes could be from some other sector-specific factor. Another possibility is that tariffs are bad, but are being canceled out by an even more powerful force — the AI boom. The FT reports:Pantheon Macroeconomics estimates that US GDP would have grown at a mere 0.6 per cent annualised rate in the first half were it not for AI-related spending, or half the actual rate.Paul Kedrosky came up with similar numbers. Jason Furman does a slightly different calculation, and arrives at an even starker number:And here’s an impressive chart:The Economist writes:[L]ook beyond AI and much of the economy appears sluggish. Real consumption has flatlined since December. Jobs growth is weak. Housebuilding has slumped, as has business investment in non-AI parts of the economy[.]And in a post entitled “America is now one big bet on AI”, Ruchir Sharma writes that “AI companies have accounte...