The claim of an AI-driven productivity boom is suspect when compared to the 1990s. Key indicators are moving in the wrong direction: prices for tech commodities like software and chips are rising instead of falling, and real income growth is weak, not accelerating.
A significant gap exists between weak real income growth (~1%) and stronger real consumption (~2%). This suggests consumers are funding their spending through the wealth effect of a rising stock market, creating a fragile dependency on equity performance.
The Federal Reserve is forced into a hawkish, inflation-fighting stance because the labor market and stock market are strong while inflation remains above target. This situation removes any justification for easing policy, making inflation the sole focus.
The massive investment in AI data centers is fueling a powerful economic cycle of equity appreciation and consumer spending. This dependence creates a significant risk, as any slowdown in this capital expenditure boom will have far-reaching negative consequences for the broader economy.
The Fed's struggle with inflation is less about domestic demand and more a direct result of administration policies. Geopolitical actions affecting oil prices and tariffs are creating supply-side shocks that push inflation higher, creating tension between the White House and the Fed.
The rise in U.S. energy exports is a symptom of global supply shocks pushing countries to seek alternative sources. This demand closes the price gap between U.S. (WTI) and global (Brent) crude, leading to higher prices at the pump for American consumers.
Despite policy pushes for reshoring, U.S. manufacturing production has been flat for over a decade. Recent optimism from PMI data is likely a temporary inventory restocking cycle, not a genuine, sustainable boom, as key drivers like exports and housing construction remain weak.
Contrary to popular belief, the U.S. consumer shows weakness. Nominal goods consumption is up only 3.5% over the last year, and real spending is below 2%. This indicates that price inflation is primarily driven by supply shocks, not strong demand, challenging the narrative of a resilient consumer.