Over the past year, artificial intelligence has undoubtedly been the most dazzling keyword in the U.S. economy. Tech giants have continued to ramp up investments, capital markets have been enthusiastic, and many believe a new wave of technological revolution is underway. Orders for semiconductors, cloud computing, data centers, and power equipment are on the rise, tech leaders' earnings reports remain impressive, and Wall Street is still willing to believe the U.S. is in a new normal.
The U.S. capital market continues to generate new narratives. The massive upcoming IPO being advanced by SpaceX further fuels the market's imagination about U.S. tech assets, commercial aerospace, and new infrastructure. However, shifting focus from the Nasdaq to ordinary households, traditional businesses, and government fiscal ledgers reveals an equally clear, different picture: price pressures have not truly receded, energy and transportation costs are rising again, tariff policies are pushing up business operating costs, and high interest rates continue to impact housing, credit, and fiscal interest payments. The U.S. economy is not simply becoming stronger or weaker; rather, the gap between its robust sectors and its stressed sectors is widening.
On May 28, the U.S. Department of Commerce revised downward the annualized growth rate for real GDP in the first quarter of 2026 to 1.6%, below the initial estimate of 2%. This figure indicates that the U.S. economy still has resilience but is insufficient to support a judgment of broad-based prosperity. Meanwhile, U.S. manufacturing and services PMIs for May remained in expansionary territory, suggesting economic activity has not cooled significantly. The true complexity of the U.S. economy lies precisely here: while macro data shows no clear deceleration, corporate earnings reports still find support, and market sentiment has not reversed, the foundation of growth is becoming increasingly concentrated, and risks are accumulating along new pathways.
Tech Giants Drive Prosperity, but the 'Profit Machine' Is Less Stable Than It Appears
The most dynamic part of the U.S. economy remains the technology sector. Artificial intelligence is no longer just a concept; it is translating into real investment, orders, and revenue. Chip demand is increasing, server procurement is expanding, data center construction is accelerating, cloud service revenue is growing, and power equipment and engineering construction are benefiting as a result. Companies like Microsoft, Amazon, Google, Meta, NVIDIA, and Oracle are both major beneficiaries of the AI wave and key drivers of U.S. capital expenditure expansion.
This chain has indeed enhanced the resilience of the U.S. economy. Against a backdrop of slowing consumption, relatively high interest rates, and rising fiscal pressures, AI investment provides a crucial support point for the U.S. economy. Large tech companies possess strong cash flows, global customer networks, and financing capabilities, allowing them to continue expanding investments even in an unstable external environment. Capital markets interpret this spending as a prelude to future productivity gains and the formation of new business models, willing to assign higher valuations to related companies. However, the problem lies precisely here—the bright spots of the U.S. economy are increasingly concentrated in a few industries, a few companies, and a few capital expenditure chains. S&P 500 corporate profits are still growing, but the profit contribution mainly comes from information technology, communication services, semiconductors, cloud computing, and AI-related firms. In contrast, energy, real estate, some consumer sectors, traditional manufacturing, and small and medium-sized enterprises have not improved simultaneously or to the same extent. While index performance is strong, the underlying divergence is becoming increasingly apparent.
More notably, the strength of U.S. corporate profits does not entirely stem from improvements in corporate efficiency. Over the past two decades, the share of U.S. corporate profits in GDP has risen significantly, from about 7% in the late 1990s to around 11% today. While factors such as technological advancement, global expansion, and the growth of platform-based companies have played a role, tax incentives, government spending, and fiscal deficits have also been significant contributors. In recent years, the U.S. fiscal deficit has consistently remained above 6% of GDP. High deficits have, in effect, translated into corporate sector profits through government spending, household transfer payments, corporate subsidies, and public procurement.
This is also where the U.S. "profit machine" is easily overestimated. On the surface, the profitability of U.S. listed companies far exceeds that of other major economies, seemingly capable of withstanding trade wars, energy shocks, and geopolitical conflicts. However, if the support from fiscal deficits for corporate profits is stripped away, the stability of U.S. corporate earnings is not as robust as it appears. U.S. corporate profits increasingly resemble an outcome jointly supported by technological advantage, global pricing power, fiscal expansion, and capital market valuations, rather than solely relying on improvements in real economic efficiency.
Compared to the late 1990s, today's U.S. tech giants indeed possess stronger cash flows and more mature business models, and a simple comparison to the dot-com bubble is inappropriate. However, it should not be overlooked that companies like Cisco, Intel, Microsoft, and Oracle at that time also had high profit growth rates; not all were "stories without profits." Today, U.S. tech stocks are stronger, but concentration in valuations, expansion in capital expenditures, and overly uniform market consensus also bring new risks. Furthermore, risks that were once easily exposed in public markets have now, to a considerable extent, shifted to private markets. The number of U.S. listed companies is much lower than during the dot-com bubble era, with many emerging companies remaining in the primary market for extended periods, supported by venture capital, private equity, and financing from large tech companies. Companies like OpenAI, Anthropic, and SpaceX represent a new generation of U.S. tech narratives, but many are still in high-investment, low-profit, or even profitless stages. Consequently, average profits among public companies appear stronger, while risks across the entire economy are hidden within private financing, project financing, and future IPO expectations.
AI investment is not without cost. Data centers, computing clusters, and cloud infrastructure are heavy-asset investments requiring substantial chips, electricity, land, water resources, engineering construction, and financing support. Inputs can quickly generate orders and capital expenditures, but it takes longer to validate returns. The market currently believes AI will transform production methods, improve corporate efficiency, and generate new application revenue, but it is too early to conclude whether such revenue can cover the continuously rising investment costs over the coming years.
Therefore, the strongest part of the U.S. economy could also become its most sensitive point in the future. If AI application revenue continues to materialize, the U.S. economy can maintain its support. However, if investment is too rapid and returns are too slow, tech companies may adjust their capital expenditures, affecting semiconductors, data centers, power equipment, cloud services, and capital market valuations. It is not that the U.S. economy lacks new momentum, but rather that this new momentum is overly concentrated. Concentration brings efficiency but also vulnerability.
The Era of Cheapness Is Ending, High Costs Are Impacting Businesses and Households
Pressure on the U.S. economy first comes from the cost side. The conflict in the Middle East persists, risks in the Strait of Hormuz are not fully resolved, and energy prices remain elevated. Rising oil prices not only affect gasoline prices but also ripple through aviation, logistics, food transportation, fertilizers, chemical feedstocks, packaging, and manufacturing intermediates. Businesses feel the impact through increased shipping costs and production expenses, while households experience persistently high prices for refueling, shopping, travel, and daily services.
Tariff policies further exacerbate this pressure. The previous administration used tariffs as a key tool to reshape supply chains and protect domestic manufacturing. In the short term, tariffs can generate some fiscal revenue and may stimulate businesses to import ahead of time and build inventories, making certain economic data appear stronger. However, in the medium term, tariffs raise the prices of imports and intermediate goods, increase business costs, reduce supply chain efficiency, and make it harder for inflation to subside.
More concerning is that the current administration is continuously seeking new tariff legal tools. Recently, citing the fight against "forced labor," the U.S. proposed imposing new tariffs on about 60 trading partners, with major economies like China, India, and Japan placed in higher tax brackets. This move, coming after U.S. judicial bodies invalidated the legal basis for some previous tariffs, indicates that tariff policy is not just a trade tool but also a means for the White House to find alternative paths amid judicial constraints, industrial protection, and midterm election pressures. For businesses, pressure comes not only from the tax rates themselves but also from the instability of expectations due to repeated adjustments in policy boundaries.
The U.S. is not facing a single type of price increase but a change in the environment that supported low inflation, low interest rates, and high profits for decades. In the past, the U.S. economy was largely built on cheap capital, cheap energy, cheap labor, and cheap goods. Globalization suppressed goods prices, inflows of overseas savings and petrodollars lowered financing costs, technological advances and outsourcing reduced corporate labor costs, and prolonged low interest rates supported valuations in real estate, stocks, and bond markets.
Currently, these conditions are changing. Deglobalization and supply chain reshoring are increasing the cost of goods and services; geopolitical conflicts and energy security anxieties are pushing up energy risk premiums; defense spending and reindustrialization require more fiscal resources; AI giants' massive purchases of chips, land, electricity, and water resources are also driving up the prices of key inputs. The rise in long-term Treasury yields indicates that the market has begun to reprice U.S. fiscal, inflation, and geopolitical risks, signaling that the U.S. is bidding farewell to the low-cost environment it once took for granted.
Faced with rising costs, businesses typically have only a few choices: absorb the costs themselves, leading to lower profit margins; pass on price increases to consumers, reducing purchasing power; or delay investments, reduce hiring, or compress inventory. Large corporations can transfer some of the pressure through pricing power and supply chain advantages, while small and medium-sized enterprises find it harder to bear. The current U.S. problem is not a single cost rising in isolation but the simultaneous impact of multiple factors: energy, tariffs, financing, wages, health insurance, and policy uncertainty. Businesses can still maintain operations, but investment and hiring decisions will become more cautious.
Pressure on the household sector is also increasing. The U.S. Personal Consumption Expenditure (PCE) inflation rate rose year-on-year to 3.8% in April, with core PCE up 3.3% year-on-year, still significantly above the Federal Reserve's 2% target. High-income households can still rely on wages, stocks, real estate, and financial assets to sustain consumption, with travel, high-end services, and some discretionary spending showing resilience. However, middle- and low-income households face a different reality: rising food prices, gasoline prices, rent, insurance, credit card payments, and auto loan costs are collectively squeezing household cash flow.
This is changing the quality of U.S. consumption. Consumption has not suddenly decelerated, but consumption stratification is becoming increasingly evident. Affluent families continue to spend, while ordinary households are becoming more cautious. Capital markets see an AI boom, while many families feel the pressure of living costs. A deep-seated contradiction in the U.S. economy is forming: the optimism of Wall Street is not aligned with the anxiety of ordinary households.
This contradiction also poses a challenge for the Federal Reserve. According to traditional logic, with slowing growth and weakening consumption, the Fed should consider interest rate cuts. However, rebounding inflation, rising energy prices, and the transmission of tariff costs make it difficult for the Fed to ease policy too early. Consequently, the new Fed Chair faces a difficult policy environment. Keeping interest rates high will continue to suppress housing, financing, corporate investment, and fiscal interest payments. Cutting rates too early could stimulate asset prices, undermine anti-inflation credibility, and renew market concerns about inflation getting out of control. More challenging is that current U.S. inflation does not stem entirely from overheated demand but also from energy, tariffs, supply chain restructuring, fiscal deficits, and geopolitical risks. The Fed can influence demand but cannot directly control oil prices, tariffs, or fiscal discipline. AI may not necessarily lower inflation in the short term either.
U.S. Economic Pressures Generate Significant Spillover Effects for the Global Economy
Currently, the U.S. remains the world's largest economy, the dollar is still the most important global funding currency, and Fed policy continues to influence global capital flows. U.S. economic risks will not be confined within its borders. As long as U.S. inflation does not fall significantly, the Fed will find it difficult to pivot quickly toward easing. As long as U.S. dollar interest rates remain high, emerging markets may continue to face capital outflows, currency depreciation, and external debt repayment pressures. Without a clear U.S. recession, global financial conditions will struggle to genuinely ease. Without a significant decline in U.S. inflation, global markets will also find it hard to form stable expectations. This is the first pathway for the spillover of U.S. economic pressure.
The second pathway stems from energy and shipping. If the U.S. cannot reach a stable ceasefire or crisis management arrangement with Iran, and Middle East tensions continue, energy and shipping costs could keep global production costs elevated. For energy-importing economies, this not only means rising inflationary pressures but also pressures from widening trade deficits and passive monetary policy tightening. Over the past two years, many economies have just begun to recover from high inflation, with limited policy space. Should energy prices rise again, fiscal, monetary, and industrial policies would face even greater constraints.
The third pathway is trade and supply chains. The U.S. attempts to reshape supply chains through tariffs, investment reviews, subsidies, and security rules, increasing the costs of global business layouts. Global trade will not simply halt but will become more fragmented in terms of rules, with compliance costs rising further. Multinational companies, when allocating capacity, will increasingly consider political risks and security rules, not just pure efficiency. For China and other manufacturing economies, the greater the U.S. economic pressure, the more likely its foreign economic policy will become tougher, with trade and industrial competition more easily amplified by the U.S. domestic political cycle.
Capital markets are also a significant spillover channel. Global investors are currently highly reliant on U.S. tech stocks and the AI narrative. Once the market begins to doubt the returns on AI capital expenditures, or if leading tech companies' profit growth slows, a re-rating of U.S. stock valuations could trigger a decline in global risk appetite. AI remains a long-term trend, but capital markets often price in long-term trends early, amplify them, and undergo cyclical corrections when expectations change. Volatility in U.S. tech stocks will not be an issue confined to the U.S. market; it will also affect global asset allocation and risk appetite.
Furthermore, the aforementioned economic pressures will impact the U.S. midterm elections. For ordinary voters, GDP, corporate earnings reports, and stock indices are not the most direct criteria for judgment. Voters are more concerned about gasoline, food, rent, healthcare, credit card bills, and job stability. Even if U.S. stock markets perform well, if living cost pressures persist, the ruling party will still face significant political pressure. Latest polls show a marked deepening of voter dissatisfaction with both major parties, with over 40% of voters dissatisfied with both Democrats and Republicans, and dissatisfaction among young voters is particularly prominent. Many dissatisfied voters believe the U.S. economic and political systems need major changes and that the economic system is unfair. This indicates that living cost pressures, wealth disparity, and political distrust are no longer separate issues but are compounding within U.S. society.
This dissatisfaction will alter the political environment for U.S. foreign policy. A considerable number of dissatisfied voters want Washington to focus less on overseas issues and more on domestic problems. For the current administration, the Middle East war, support for Israel, foreign aid, and energy price issues will become more sensitive. If the U.S. government invests more resources overseas but fails to alleviate domestic price, housing, and employment pressures, it will be easily criticized for neglecting domestic livelihoods. Opponents will also focus their attacks on tariff increases, fiscal deficits, war risks, healthcare burdens, and living costs. Ahead of the midterm elections, the most sensitive issue for the U.S. economy may not be whether a technical recession occurs, but whether living pressures on ordinary families continue to rise. If the AI boom is mainly reflected in tech company profits and capital market valuations, while middle- and low-income households continue to bear high prices and high interest rates, U.S. economic divergence will further translate into political polarization.
In summary, observing the U.S. economy requires looking beyond just growth rates and stock markets. More importantly, it involves observing how risks move: from energy and tariffs into business costs, from business costs into prices and profit margins, from prices into household purchasing power, from household pressures into electoral politics, and from the Fed's policy dilemma into global financial markets. Over the next few quarters, several key threads warrant close attention: whether AI investment can deliver sufficient returns, whether energy and tariff costs can be controlled, whether consumer pressure will spread from low-income to middle-income groups, whether the Fed can maintain a balance between inflation and growth, and whether domestic political dissatisfaction in the U.S. will further increase the toughness of its foreign economic policies.
The U.S. economy still appears to have strong sectors, but risks have begun to spread along multiple pathways involving businesses, households, policy, elections, and global markets. This is key to understanding the U.S. economy today.
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