The first quarter's GDP growth was revised down to 1.6%, falling short of the economy's potential (est. 2.25-2.5%). This softness is particularly alarming because it occurred despite the tailwinds from deficit-financed tax cuts and a rebound in government spending after the shutdown, suggesting underlying fragility.
A key paradox in the Q1 data is the strength of corporate profits despite weak overall economic income (GDI). This divergence suggests a distributional shift where businesses are capturing a larger share of the economic pie, likely due to labor's diminished bargaining power and aggressive price increases.
A significant red flag for the U.S. economy is the year-over-year decline in real disposable income per capita. This erosion of consumer purchasing power rarely happens outside of a recession and is a deeply concerning indicator for future spending, the economy's primary engine.
The AI boom is a double-edged sword for the economy. While driving growth through massive investment in data centers, it's also a key source of inflation. Prices for essential computer equipment and software have surged 10% year-over-year, directly feeding into broader price pressures.
The US personal savings rate fell to a dangerously low 2.6%. This reflects households drawing down savings to maintain spending amidst high inflation, a clear sign of financial stress. Such a low rate suggests current consumption levels are unsustainable without a rebound in real income.
Corporate profits now command a record 16.7% share of national income. While a reduced labor share is a factor, a more significant driver has been the long-term decline in corporate interest payments. This reduction in borrowing costs has directly inflated corporate profits to historic highs.
Gross Domestic Income (GDI), an alternative measure of economic output, grew at a mere 0.9% in Q1, significantly below the 1.6% GDP figure. An average of GDP and GDI, often considered a more accurate representation of the economy, points to a sluggish 1.3% growth rate, signaling deeper weakness.
Calls for the Federal Reserve to cut interest rates to stimulate AI investment are misguided. A truly transformative technology will naturally attract sufficient private capital. The Fed's mandate is to maintain price stability and full employment, not to subsidize specific industries or distort capital allocation.
The US economy is showing stagflationary characteristics. GDP growth is weakening and projected to remain soft, while key inflation measures like PCE are nearly double the Fed's 2% target. This toxic mix limits the Federal Reserve's ability to support the economy without worsening price pressures.