A once-in-a-generation investment boom has created lots of winners - but many Americans are feeling left out
The U.S. economy heated up even as the weather cooled. Can the good times keep going?
An unyielding U.S. economy has shrugged off a number of blows to keep growing at a faster-than-expected speed - and there's a good chance the six-year old expansion has a lot more room to run.
The economy is poised to show a growth rate of 3% or more from July to September when the government next week reports gross domestic product for the third quarter. The U.S. might even be on track to post frothy annual growth of 2.5% in 2026.
It wasn't supposed to happen.
Many economists predicted growth would slow after the spring as spending from large tax refunds dried up and the U.S.-hosted World Cup ended. High oil prices (CL00) (BRN00), rising inflation, the lingering effect of tariffs and the ongoing conflict with Iran were expected depress growth.
Instead, consumer spending picked up and businesses boosted investment.
The economy still faces lots of challenges, no doubt. The latest obstacle is rising interest rates as the Federal Reserve tries to bring inflation under control. Higher interest rates could even threaten a stock-market boom DJIA SPX COMP that's given the economy a huge dose of adrenalin.
Yet the good times could also go on for quite a while, spearheaded by a once-in-a-generation investment boom in new technologies such as artificial intelligence.
The investment boom has supercharged the economy by raising productivity, hoisting profits, driving record stock-market gains and underpinning consumer spending, especially among the wealthy.
And yet, most Americans aren't feeling the burn.
High inflation is the biggest killjoy - goods and services cost about 30% more now than they did before the COVID-19 pandemic. Wages are barely keeping up with inflation, if that. And people worry about AI taking their jobs, raising their energy bills or worse.
"If most people ask, 'Am I better off now than I was four years ago,' the answer is, 'Not really,'"said Jim Baird, chief investment officer of Plante Moran Financial Advisors in Michigan.
Faster track
Just a few years ago, the fastest rate of growth the economy was thought to be able to sustain each year was around 1.8%, a mediocre number historically.
And now? Many economists think the U.S. can grow 2% to 2.5% a year through the rest of the decade, barring an unforeseen shock.
The early returns look good. GDP grew at an average annual clip of 2.7% from 2022 to 2025. Massive government stimulus helped for the few years after the pandemic, but consumers and businesses have carried the load the past two years.
The secret sauce of the economy has been an explosion in business investment.
First, companies spent on software and other technologies to improve production at a time of yawning labor shortages. Then, the piled money into AI as machine learning promised to open the door to an even more profitable future.
All the spending seems to have worked. The productivity of workers and businesses - the key to a higher standard of living - has accelerated since the pandemic.
From 2022 to 2025, for instance, productivity rose by an average annual rate of 2.4%, compared to a 1.4% rate in the five years before the 2020 onset of the pandemic. Similar increases are likely in the next five years if AI actually delivers.
"The AI revolution is real," said Eugenio Aleman, chief economist at Raymond James. "This is not your father's housing bubble."
Rising productivity simply means each worker can do more in the same amount of time as they did in the year before. Steadily rising productivity allows companies to earn high profits and even pay their workers more.
Profits have definitely risen, in many cases allowing businesses to cope with higher oil prices and inflation.
Profit margins - how much a company earns per every $100 in sales - have reached historic highs in the past few years. Margins for S&P 500 companies reached almost 16% this year, compared to 8% to 12% a year from 2010 to 2019.
For a while, workers also reaped the benefits in the form of higher wages and benefits. Annual increases in compensation jumped to as high as 5% in 2022 - almost double the prepandemic trend - when companies were scrambling to hire people at a time of acute labor shortages.
No longer is that the case. Wages and benefits are now rising a little over 3% a year, but that's not enough to keep up with inflation. The result: Millions of Americans are falling behind financially, at least for now.
Wealth effect
The news is not all bad. Strong GDP may mask the hardships many Americans face, but a steadily growing economy also means most jobs are not in danger. Layoffs are near a historic low and unemployment is also unusually low.
Good job security, in turn, gives Americans the comfort to keep spending at levels sufficient to propel the economy forward. And that's what they have been doing.
Consumer spending, which accounts for two-thirds of economic growth, has risen by a healthy 2.6% a quarter since 2022, government data show.
A close look at where all the spending is coming from, however, also reveals fractures in the economy that a broad statistic like GDP cannot.
A highly publicized study last year by Moody's Analytics contended the richest 10% of Americans earning $250,000 a year or more accounted for a record 50% of all consumer spending.
The estimate has been much debated, but economists all agree: The wealthy are definitely in the driver's seat of the U.S. economy. It's not so great, as Baird put it, for working-class or lower-income Americans living paycheck to paycheck.
AI plays a big role this, too. The stock market has skyrocketed since the pandemic largely because of massive gains in companies like Nvidia (NVDA) that are at the center of the AI revolution.
All the wealth produced by the stock market has enabled older Americans to splurge on themselves and their kids. Economists call it the "wealth effect."
"It's been an incredibly powerful driver of spending over the last several years," said Michael Pearce, chief U.S. economist at Oxford Economics.
The AI revolution probably has a lot more room to run, too. As companies better figure out how to use AI, productivity could continue to surge at least until the end of the decade. Profits are likely to stay high and perhaps push the stock market higher.
"I think we are still in the very early innings in learning how to deploy AI effectively," Baird said.
Labor's role
The economy is going to need it, especially with a slower-growing or even declining labor force.
The growth rate of any economy - and worker pay, too - is determined in the long run by the combination of population growth and productivity growth. If the population is flat, the economy can only grow by workers and businesses becoming more productive.
From 1950 to 2025, the size of the potential labor force rose about 1.4% a year, according to government data. The labor force is expected to rise an average of just 0.4% a year or less through 2030, the nonpartisan Congressional Budget Office estimates.
The labor force could even shrink if more baby boomers retire soon and the Trump administration's freeze on immigration persists.
That's why the performance of the U.S. economy - and even the American way of life - might become more dependent on higher productivity in the age of AI. It's the only way chronic labor shortages will be alleviated and bigger wage gains for workers are likely to be realized.
"It means the economy is more dependent on productivity gains," Pearce at Oxford Economics said. "If they were disappointing, the economy could slow more sharply."
Whatever the case, the only way most Americans are likely to appreciate strong GDP reports are if they can feel the actual benefits of a steadily growing economy in their own lives -mainly through rising real wages, lower inflation and lots of available jobs. None of those conditions exist right now.
"The economy is growing, but it's not translating into higher income growth and employment," Aleman at Raymond James said.
-Jeffry Bartash
Comments