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"The nation is in for a turbulent few months as the worst of the tariff impact hits businesses’ and families’ budgets. Polling and consumer sentiment data show fear of and frustration over high and rising prices and a worsening job market. But economic growth is where things get really bizarre. The word “stagflation” comes partly from stagnation. It’s supposed to be a period of weak growth — or even contraction. Yet the U.S. economy expanded at a brisk 3.3 percent in the second quarter, and the latest estimate from the Atlanta Fed indicates the growth rate could be around 3 percent in the third quarter, too. The key to understanding the economy is to recognize that two trends are propping up growth: spending by the rich and companies investing heavily in the AI boom. The economy is highly skewed right now toward certain big players.
So far this year, business spending on software and data centers — mainly for AI — has been a bigger contributor to the economy than consumption. That is stunning. The U.S. is widely known as a consumer economy, where the vast majority of growth typically comes from people spending on everything from burgers and fries to facials and football games. Yet suddenly, this is an AI economy. As JPMorgan wrote in a recent report, “AI-related capital expenditures contributed 1.1% to GDP growth, outpacing the U.S. consumer as an engine of expansion.” And that spending is dominated by major tech players such as Meta, Alphabet, Microsoft, Amazon and Oracle. There’s still some spending going on, but it’s mainly driven by the top 20 percent of earners: those making roughly $175,000 a year or more. As Mark Zandi, chief economist at Moody’s Analytics, points out, the bottom 80 percent of earners are basically treading water: Their spending is just keeping up with inflation. In contrast, the top 20 percent are still growing their spending far faster than inflation, probably because the rich are benefiting the most from record stock-market gains.
There’s a strong likelihood the economy keeps chugging along even as middle- and lower-income households face a big squeeze from higher prices and wages that don’t keep up (or barely do). There’s little incentive for employers to give large pay increases when it’s tough to find another job.
There has been ample discussion about how challenging a stagflation-like environment is for the Fed. As it focuses on cutting rates to stop more layoffs, it runs the risk of higher inflation or some sort of AI bubble forming, reminiscent of the dot-com era. But there’s an equally complex situation in a bifurcated “K-shaped economy” where the top is thriving and the rest are barely staying afloat. Or, in the business context, where AI-related businesses are thriving and many other sectors, such as real estate, farming and manufacturing, are struggling. Which groups are policymakers going to help?' “The fundamental challenge with a K-shaped economy is that for those at the top, you would hike rates sharply — while for those at the bottom, you would lower them dramatically,” said Peter Atwater, president of Financial Insyghts.
There are many unusual forces at play, but too often what gets lost in the conversation is this: It’s a turbulent economy for the middle class, and it would be a mistake to let their situation worsen."
Link
Just a few months of turbulence? What will follow that? The Golden Age?
So far this year, business spending on software and data centers — mainly for AI — has been a bigger contributor to the economy than consumption. That is stunning. The U.S. is widely known as a consumer economy, where the vast majority of growth typically comes from people spending on everything from burgers and fries to facials and football games. Yet suddenly, this is an AI economy. As JPMorgan wrote in a recent report, “AI-related capital expenditures contributed 1.1% to GDP growth, outpacing the U.S. consumer as an engine of expansion.” And that spending is dominated by major tech players such as Meta, Alphabet, Microsoft, Amazon and Oracle. There’s still some spending going on, but it’s mainly driven by the top 20 percent of earners: those making roughly $175,000 a year or more. As Mark Zandi, chief economist at Moody’s Analytics, points out, the bottom 80 percent of earners are basically treading water: Their spending is just keeping up with inflation. In contrast, the top 20 percent are still growing their spending far faster than inflation, probably because the rich are benefiting the most from record stock-market gains.
There’s a strong likelihood the economy keeps chugging along even as middle- and lower-income households face a big squeeze from higher prices and wages that don’t keep up (or barely do). There’s little incentive for employers to give large pay increases when it’s tough to find another job.
There has been ample discussion about how challenging a stagflation-like environment is for the Fed. As it focuses on cutting rates to stop more layoffs, it runs the risk of higher inflation or some sort of AI bubble forming, reminiscent of the dot-com era. But there’s an equally complex situation in a bifurcated “K-shaped economy” where the top is thriving and the rest are barely staying afloat. Or, in the business context, where AI-related businesses are thriving and many other sectors, such as real estate, farming and manufacturing, are struggling. Which groups are policymakers going to help?' “The fundamental challenge with a K-shaped economy is that for those at the top, you would hike rates sharply — while for those at the bottom, you would lower them dramatically,” said Peter Atwater, president of Financial Insyghts.
There are many unusual forces at play, but too often what gets lost in the conversation is this: It’s a turbulent economy for the middle class, and it would be a mistake to let their situation worsen."
Link
Just a few months of turbulence? What will follow that? The Golden Age?