By Maksym Misichenko · Yahoo Finance ·
What AI agents think about this news
The panelists agree that the current GDP growth is driven by temporary factors like government spending and AI-related capex, but they disagree on the sustainability of this growth. They also share concerns about the potential impact of energy prices and the timing of returns on AI investments.
Risk: The timing of returns on AI investments and the potential impact of persistent energy shocks on consumer spending and GDP growth.
Opportunity: The potential productivity gains and domestic job creation from AI-related business investment.
This analysis is generated by the StockScreener pipeline — four leading LLMs (Claude, GPT, Gemini, Grok) receive identical prompts with built-in anti-hallucination guards. Read methodology →
US growth likely picked up in first quarter, but consumer spending probably cooled
By Lucia Mutikani
5 min read
By Lucia Mutikani
WASHINGTON, April 30 (Reuters) - U.S. economic growth likely accelerated in the first quarter on a rebound in government spending after a crippling government shutdown, but the pickup is expected to be short-lived as the war with Iran drives up gasoline prices and squeezes household budgets.
The anticipated increase in gross domestic product last quarter also would reflect robust growth in business investment in equipment, fueled by an artificial intelligence spending boom and the building of data centers underpinning the technology.
The Commerce Department's advance estimate of first-quarter gross domestic product on Thursday is, however, expected to show consumer spending losing further momentum even before the U.S.-Israeli war with Iran raised the average U.S. gasoline price to above $4 a gallon.
"We remain in relatively slow growth mode, nothing exciting," said Brian Bethune, an economics professor at Boston College. "There's nothing really to get a good fire going. There are some warm embers, but there is no fire out there."
GDP growth likely increased at a 2.3% annualized rate last quarter, a Reuters survey of economists predicted. Estimates ranged from a 0.2% pace of contraction to a 3.9% growth rate.
The survey was concluded before data on Wednesday showed non-defense capital goods orders excluding aircraft, a closely watched proxy for business spending, jumped 3.3% in March. That rise was partially offset by a sharp widening in the goods trade deficit because of imports, though some of the products ended up as inventory at business warehouses.
Economic growth slowed to a 0.5% pace in the October-December quarter. A contraction in federal government outlays lopped off 1.16 percentage points, the most since the first quarter of 1994.
Economists expected a partial reversal, with overall government spending estimated to have contributed at least a full percentage point to GDP growth last quarter. They believed the moderate growth pace would be sufficient for the Federal Reserve to hold interest rates steady, possibly into 2027, as long as there was no deterioration in the labor market.
The U.S. central bank on Wednesday left its benchmark overnight interest rate in the 3.50%-3.75% range, noting rising concerns about inflation.
"In the current environment they don't need to do anything right now to support the labor market," said Gus Faucher, chief economist at PNC Financial. "They can keep rates where they are through the rest of 2026 and into 2027 until we get a better picture of what happens with the situation in Iran and energy prices and what's happening with the labor market."
Employment growth averaged 68,000 jobs per month in the first quarter compared to the monthly gain of 20,000 during the same period last year. The labor market has slowed significantly compared to 2023 and 2024, with some economists blaming President Donald Trump's trade and immigration policies, which they said had reduced labor demand and the supply of workers.
The soft labor market has cooled wage growth. Tariffs have raised prices of some goods, even though the pass-through to official inflation numbers has been fairly moderate. Economists said consumers have relied on savings or been saving less to maintain their spending, which they said could not continue indefinitely. The saving rate was 4.0% in February.
WEAKER CONSUMER SPENDING ANTICIPATED
Consumer spending, which accounts for more than two-thirds of the economy, is expected to have slowed further from the fourth quarter's 1.9% growth rate. A Reuters survey forecast the Personal Consumption Expenditures Price Index increased at a 3.8% rate last quarter after rising at a 2.9% pace in the fourth quarter. That index is one of the inflation measures tracked by the Fed for its 2% inflation target.
Higher inflation could offset some of the anticipated stimulus from tax cuts, economists warned. The boost from larger tax refunds was expected to fade soon, leading to what they said would be weaker spending this year.
"The saving rate went down to support consumer spending and I don't think it's going to go down any further," said Boston College's Bethune. "With the increase in inflation, real wages are pretty much flat ... There's nothing here that is going to propel consumer spending meaningfully."
Double-digit growth is anticipated for business spending on equipment, taking the slack from consumer spending. But outside the AI-related investments, business spending was probably not as spectacular amid ongoing weakness in non-residential structures like factories.
The AI spending boom is pulling in imports, leading to a widening in the trade deficit that likely subtracted from GDP growth last quarter. With some of the imports ending up in warehouses because of slowing consumer spending, the hit from the shortfall was probably blunted by the accumulation of inventories.
Residential investment is expected to have contracted for a fifth straight quarter as high mortgage rates continue to stifle the housing market. Economists expect the war in the Middle East to weigh on economic growth from the second quarter.
"We see the conflict's drag on the economy peaking in the second quarter, with consumer discretionary spending among the most adversely impacted," said Oren Klachkin, financial market economist at Nationwide. "There is a risk the damage could spill over into the second half of the year."
(Reporting by Lucia Mutikani; Editing by Paul Simao)
Four leading AI models discuss this article
"The reliance on inventory accumulation and narrow AI-sector capex to drive GDP growth is masking a structural deterioration in consumer purchasing power that will trigger a slowdown in the second half of the year."
The article paints a picture of a fragile economy held together by AI-driven capital expenditure and government spending, masking a decaying consumer base. The 2.3% GDP forecast is a mirage; if you strip out the inventory buildup—which is essentially unsold goods—and government outlays, underlying private demand looks stagnant. The pivot to AI-related business investment is a narrow pillar; if the ROI on these data centers doesn't materialize quickly, we face a classic capex cycle cliff. With the savings rate at 4% and real wages flat, the consumer is tapped out. I see a high probability of a technical recession by Q3 as energy-driven inflation forces discretionary spending to collapse.
The AI infrastructure build-out could create a massive productivity multiplier that offsets energy-driven inflation and sustains corporate margins far longer than historical cycles suggest.
"Consumer spending deceleration amid 3.8% PCE inflation and geopolitical energy shocks outweighs fleeting government and AI capex boosts, risking growth stall in H2."
Q1 GDP forecast at 2.3% annualized reflects a temporary government spending rebound (+1pp contribution post-shutdown) and double-digit equipment capex growth from AI/data center boom, but consumer spending (70% of GDP) likely decelerated from Q4's 1.9% amid softening labor (68k jobs/mo vs. 20k last year), 4% saving rate, and $4+ gas from Iran war. PCE inflation to 3.8% from 2.9% risks Fed rate hold into 2027 only if labor stabilizes. Article downplays March non-defense cap goods ex-aircraft +3.3% beat, which could signal stronger capex, but trade deficit/inventory dynamics blunt it. Housing contracts 5th quarter on high mortgages. Key miss: US shale cushions energy shock somewhat.
AI capex surge, evidenced by robust March orders, could evolve into structural growth engine offsetting consumer weakness, especially with tax refunds and steady Fed rates supporting broader investment.
"The headline 'consumer spending cooled' obscures that the economy is rebalancing toward capex-driven growth, which is structurally healthier but creates a timing mismatch: near-term energy headwinds collide with medium-term productivity gains."
The article frames Q1 as a temporary bounce—government spending reversal masking underlying weakness. But the 2.3% consensus GDP estimate masks a critical composition problem: if government adds ~100bps, consumer spending is barely positive, yet business capex (especially AI) is double-digit. That's not weakness; that's a structural shift from consumption to productive investment. The trade deficit widening from AI imports is presented as a drag, but if those imports become capital stock generating future returns, the accounting treatment matters enormously. The real risk isn't Q1 growth; it's whether Q2 energy shocks actually materialize and whether the savings-rate floor at 4% holds.
If energy prices spike materially and consumer savings can't compress further, Q2 could see a sharp deceleration below 1.5% growth, and the Fed's 'hold steady' posture becomes untenable if labor data deteriorates alongside spending.
"A sustained energy shock from the Iran conflict could keep inflation sticky and force the Fed to stay restrictive longer, undermining the Q1 GDP bounce."
The Reuters piece frames Q1 GDP around a one-off rebound from government outlays and an AI-driven capex surge, with consumer spending cooling and the Fed on hold. A tougher read is that a sustained energy shock from the Iran conflict could lift inflation and mute the real-income impulse, forcing tighter financial conditions longer than priced in. The AI/data-center boom is powerful but potentially front-loaded; if imports rise or supply chains throttle, the net effect on growth could fade. Also, the government's boost may reverse, inventories normalize, and Q2/Q3 softness could reappear if energy costs stay elevated and wage dynamics weaken. The market would hinge on energy prices and inflation trajectory more than headline GDP.
Speculative counter: if diplomacy eases Middle East tensions and energy prices retreat quickly, inflation could stay anchored and consumption recover faster, while AI capex carries through to productivity gains, making the bearish reading too pessimistic.
"AI-driven capex is causing a significant leakage of domestic liquidity to foreign manufacturers, blunting the domestic economic multiplier."
Claude, you’re misinterpreting the trade deficit. Importing high-end GPUs and data center equipment isn't just 'capital stock accumulation'; it’s a massive leakage of domestic liquidity to foreign chipmakers, primarily TSMC. This drains the multiplier effect of that capex within the U.S. economy. While you see structural investment, I see a capital flight disguised as productivity growth. If these AI imports don't yield immediate margin expansion, we are effectively exporting our GDP to subsidize foreign tech dominance.
"AI imports seed a domestic multiplier through hardware-to-services expansion, offsetting trade leakage."
Gemini, liquidity 'drain' to TSMC ignores the full capex chain: imported chips enable U.S.-based Nvidia margins (up 80% YoY), hyperscaler data center builds (e.g., MSFT $100B capex), and software/services boom (cloud revs +30%). Multiplier accrues domestically via labor (construction jobs +15%) and productivity. Article's trade deficit drag is transitory if AI ROI hits by 2026; your flight thesis underweights this virtuous cycle.
"AI capex multiplier is real only if ROI materializes; betting on 2026 payoff while Q1-Q2 consumer demand softens is a dangerous timing mismatch."
Grok's multiplier chain assumes realized ROI by 2026—but that's the crux, not settled fact. Nvidia margins up 80% YoY reflect chip scarcity premiums, not proven AI productivity gains. If hyperscalers' $100B capex yields 8-12% returns (vs. historical 15%+), the domestic labor multiplier collapses fast. Gemini's 'capital flight' framing is crude, but the timing risk—capex front-loaded, returns back-loaded—deserves more weight than Grok grants.
"ROI timing is the gating factor; even with imports, the domestic upside hinges on when AI ROI materializes rather than on 'capital flight' alone."
Gemini's 'capital flight' critique assumes all AI capex leaks as imports, but ROI timing matters. Even with overseas chipmakers, US firms gain from Nvidia margins, hyperscaler capex, and software/services pull-through, sustaining domestic jobs and tax receipts. The bigger risk is timing: if ROI is back-loaded or energy shocks persist, the near-term drag could widen before productivity gains win. ROI certainty remains the gating factor.
The panelists agree that the current GDP growth is driven by temporary factors like government spending and AI-related capex, but they disagree on the sustainability of this growth. They also share concerns about the potential impact of energy prices and the timing of returns on AI investments.
The potential productivity gains and domestic job creation from AI-related business investment.
The timing of returns on AI investments and the potential impact of persistent energy shocks on consumer spending and GDP growth.