Key Points:
- Business investments added a massive 1.48 percentage points to the 2% economic growth seen in the first quarter.
- Major technology companies plan to spend roughly $725 billion on artificial intelligence infrastructure this year.
- Every day, consumer spending slowed but still contributed 1.08 percentage points to the overall economy.
- Inflation rose 3.5% over the past year as the ongoing war in Iran pushed global energy costs much higher.
The United States economy currently runs heavily on artificial intelligence. During the first three months of the year, business investment actually contributed more to overall economic growth than consumer spending. This represents a massive shift in how the country generates wealth. For decades, the traditional driver of American economic power relied strictly on regular people buying goods and services. Now, large companies buying advanced technology lead the charge.
Data from the Bureau of Economic Analysis paints a very clear picture of this new reality. In the first quarter, the real gross domestic product grew by a solid 2%. When economists look at that specific number, they see business investment adding a massive 1.48 percentage points to the total growth. At the same time, consumer spending slowed, contributing only 1.08 percentage points. The sudden boom in artificial intelligence spending literally lit a fire under the national economy.
This flip surprises many financial experts because it breaks a long historical trend. Every day, consumer spending typically accounts for roughly two-thirds of gross domestic product. To be exact, consumer spending still made up 68.1% of the total economy during the first quarter. However, the sheer speed and scale of corporate spending on new technology enabled business investments to outpace consumer spending as the primary engine of economic growth.
Jeffrey Roach serves as the chief economist at LPL Financial. He noted that buying new tech equipment continues to significantly boost the broader economy. He explained that the economy still has a lot more room to grow if the technology boom of the late 1990s serves as a reliable historical guide. Companies realize they must upgrade their computer systems immediately or risk falling behind their fiercest competitors.
The biggest technology companies on the planet lead this massive spending spree. On Wednesday, industry giants including Meta, Microsoft, Alphabet, and Amazon all increased their capital expenditure projections for the rest of the year. These tech leaders plan to spend heavily on massive data centers and advanced computer chips to support their smart software platforms.
Before these companies reported their updated numbers, financial experts estimated the group would spend around $670 billion on artificial intelligence this year. Following the Wednesday night earnings reports, the total number rose to nearly $725 billion. Furthermore, Apple plans to release its own earnings report on Thursday afternoon. If Apple announces its own massive hardware investments, that final spending figure will stretch even further.
While businesses spend cash freely, American households face a much tougher financial reality. Consumer spending slowed down compared to the previous year, but it remained in positive territory during the first quarter. This shows that regular citizens remain moderately resilient even as they face surging energy costs directly fueled by the ongoing war in Iran.
The types of things people buy have also changed recently. Growth in consumer spending largely came from people paying for services, which added 1.11 percentage points to the economy. Meanwhile, people stopped buying as many physical items, causing spending on material goods to drop by 0.03 percentage points. Families now prioritize paying for necessities over buying new clothes or home electronics.
Financial analysts at Moody’s warned clients about these changing consumer habits in early April. They noted that while household finances look generally intact on paper, spending growth remains modest and increasingly uneven across different income levels. The analysts warned that this fragile situation leaves everyday consumption highly exposed to renewed energy price pressures stemming from the conflict in the Middle East.
Other areas of the economy also played a role in the final first-quarter numbers. Government spending and public investment added 0.73 percentage points to the overall growth. However, a drop in exports of American goods and services dragged the final number down, creating a 1.3 percentage-point loss for the quarter.
High prices continue to frustrate everyday buyers across the country. The Personal Consumption Expenditures index data released on Thursday showed inflation ticking up slightly in March. Prices rose by 0.7% in March compared to the previous month, and jumped 3.5% compared to the same month one year ago. The core inflation number, which excludes highly volatile food and energy categories, rose 0.3% for the month and 3.2% for the year.
Bradford Smith, a portfolio manager at Janus Henderson Investors, shared his thoughts on the new data. He views the report as a positive sign that the economy remains robust, even as it deals with a severe oil price shock that analysts expected to weigh on consumer pocketbooks in March.
Smith expects the oil shock caused by the war in Iran to naturally dissipate by the middle of 2026. Once energy prices finally calm down, he believes artificial intelligence investments, rising corporate profits, tax rebates, and loose financial conditions will push the economy back toward massive long-term growth.
