Weekly Economic Outlook — Jul 27: Is a Booming AI Sector Masking Weaker Economic Fundamentals?

The US economy appears to be maintaining a consistent but modest growth trajectory, with real GDP poised to expand at a 2.0% annualized rate in the second quarter. This performance would closely mirror the 2.1% growth recorded in the first quarter and the 2.0% expansion seen for the full year in 2025, suggesting an economy that is stable rather than accelerating.

Beneath this placid surface, however, a powerful technological transformation is providing a critical pillar of support. A surge in investment related to artificial intelligence is fueling a construction and manufacturing boom in specific sectors. The nominal value of data center construction has jumped 23.0% from a year ago. In parallel, shipments of computers, related products, and communications equipment are also up 23.0% over the same period, indicating a robust buildup of technological infrastructure.

The scale of this spending is substantial. Capital investment by a handful of "hyperscaler" technology firms¹ is projected to approach $700 billion in 2026, an increase of $300 billion from 2025. This increase alone could contribute a full percentage point to GDP growth, an estimate that aligns with recent academic research on AI's potential economic contribution. While this focused investment may be "crowding out"² capital from other sectors, it is also "crowding in" activity in adjacent industries like power generation and water supply. The key takeaway is that without the powerful tailwind from AI, overall economic growth would appear considerably weaker.

A detailed look at the components of GDP reveals a mixed picture.

CONSUMER SPENDING

Consumption, the largest driver of the US economy, is forecast to have grown at a 2.2% real rate, contributing 1.5 percentage points to headline GDP. This growth is being led by a remarkable 22.3% annualized surge in auto sales and a strong 6.8% rise in inflation-adjusted retail sales excluding autos. However, spending on services, which constitutes the majority of consumption, is estimated to have grown at a much slower 1.4% pace, tempering the overall figure.

BUSINESS AND RESIDENTIAL INVESTMENT

Business investment is expected to show solid growth of 5.7%, adding 0.8 percentage points to GDP. Gains are being driven by spending on equipment and intellectual property, even as broader commercial construction acts as a drag. The boom in data centers is a notable exception within the commercial construction category. Meanwhile, residential construction appears to have been flat in the second quarter. While this adds nothing to GDP growth, it marks a halt to the consistent quarterly contractions that have occurred since 2024, partly reflecting a lack of available labor for new home builds.

GOVERNMENT, TRADE, AND INVENTORIES

Government spending is projected to have grown at a modest 1.2% rate, adding 0.2 points to GDP as federal outlays recover from a temporary shutdown in the fourth quarter of last year. The trade balance is expected to be a significant headwind, subtracting an estimated 0.8 percentage points from real GDP growth due to a surge in goods imports. Offsetting this, businesses appear to have been rebuilding inventories during the quarter after a drawdown in Q1, a dynamic expected to add 0.3 percentage points to growth.

When aggregated, these components point to the 2.0% real GDP growth forecast for the second quarter. This steady, if unspectacular, rate of expansion highlights an economy increasingly dependent on a historic wave of technological investment to maintain its forward momentum.

Key terms

1. Hyperscalers: A term for the largest cloud computing and data center providers, such as Amazon, Google, and Microsoft. Their massive capital expenditures on infrastructure like data centers have a significant impact on economic activity.

2. Crowding Out: An economic concept where increased investment in one area (e.g., by the government or a specific industry) absorbs capital and resources, potentially raising costs and making it harder for other sectors to fund their own growth.