Changing Drivers of Growth in the U.S. Economy

The consumer has been the dominant force behind U.S. economic growth over the past several years. Despite high inflation and persistently weak consumer sentiment, households continued to spend, driving much of the nation’s growth as measured by gross domestic product (GDP).

Over the past eight quarters, real GDP growth averaged 2.23% per quarter. Consumer spending accounted for roughly 83% of that growth, well above its traditional share of the economy.

However, the latest GDP report suggests that some of the headwinds facing consumers, particularly higher gasoline prices and a slowing labor market, may finally be having an impact.

Preliminary estimates for the first quarter show a notable shift. The consumer’s contribution to GDP fell to approximately 54%, down sharply from the 83% average over the prior eight quarters. Goods spending weighed on overall growth, with recreational goods and vehicles having the largest negative impact, reducing GDP by 0.22 percentage points.

The U.S. economy is primarily driven by services, and it was services spending that continued to support overall consumption. Given the shift toward an experience-based economy following the COVID shock, one might expect spending on experiences to remain strong.

However, food services and accommodations, a reasonable proxy for the experience economy, also detracted from growth, shaving 0.14 percentage points from GDP. Instead, nearly half of all services spending growth came from health care. This is consistent with trends in the labor market, where health care has been responsible for a disproportionate share of recent job gains.

Taken together, the report points to a consumer that may be beginning to weaken. This matters because of the outsized role consumers have played in sustaining economic growth.

If the consumer is losing momentum, something else must take its place. Increasingly, that “something” is artificial intelligence.

Gross private domestic investment, the category that includes spending on equipment, software, and structures, accounted for nearly 75% of GDP growth in the first quarter. Investment in information processing equipment and software, much of it tied to artificial intelligence, drove nearly all of that growth. Residential investment, by contrast, reduced overall growth.

Net exports were the largest drag on GDP. The negative contribution from imports nearly doubled the positive contribution from exports. Notably, much of the information processing equipment fueling AI investment is imported, reinforcing this drag on growth.

A great deal is now riding on artificial intelligence. Equity markets are near all-time highs, driven in large part by technology firms making substantial AI investments. Expectations for productivity gains are high, with many anticipating that AI will help ease inflationary pressures and create room for the Federal Reserve to lower interest rates.

For the past several years, the economic engine has been the American consumer. Consumer spending will continue to represent almost 70% of the U.S. economy, but investment in artificial intelligence is covering for other developing weaknesses. An economy relying less on the consumer and more on capital investment, particularly in emerging technologies, raises important questions about the sustainability and balance of future growth. The consumer has long been the foundation of the U.S. economy, and we can expect that to remain. Replacing that foundation, even partially, is not without risk. With a labor market that has been propped up by healthcare hiring, and substantial growth now driven by AI investments, a good question might be about the sustainability and duration of both.