Fed Powell: Spending on AI and data centers has been "holding up business investment."

Key Concepts

• Economic Growth Forecasts: Projections for the rate of economic expansion.
• Consumer Spending: Expenditure by households on goods and services.
• AI Spending: Investment in artificial intelligence technologies, particularly in data centers.
• Business Investment: Spending by companies on capital goods, R&D, and other assets.
• Fiscal Policy: Government actions related to spending and taxation.
• SEP (Summary of Economic Projections): A report detailing the Federal Reserve's economic outlook.

Economic Growth Outlook

The current economic forecast indicates a pickup in growth across many sectors. This is attributed to two primary drivers:

1. Resilient Consumer Spending: Consumer spending has remained strong and has held up well, contributing significantly to economic activity.
2. AI-Driven Business Investment: Investment in business, particularly in data centers and related AI infrastructure, continues to be robust.

Baseline Growth Expectations

The baseline expectation for the upcoming year, both from the Federal Reserve (Fed) and external forecasters, is for an increase in economic growth from its current relatively low level.

• Current Year Growth: The median projection in the Summary of Economic Projections (SEP) for the current year's growth is 1.7%.
• Next Year Growth: The SEP median forecast for next year's growth is 2.3%.

Adjustments to Growth Projections

There's a nuance in the growth figures due to the impact of a government shutdown. When accounting for this, the projections can be adjusted:

• Adjusted Next Year Growth: Removing approximately 0.2% from the 2026 forecast and reallocating it to 2025 would result in growth figures of roughly 1.9% for the current year and 2.1% for the next year.

Supporting Factors for Future Growth

The projected solid growth for the next year is underpinned by several key factors:

• Supportive Fiscal Policy: Government fiscal policy is expected to provide a positive influence on the economy.
• Continued AI Spending: Investment in AI technologies is anticipated to persist.
• Sustained Consumer Spending: The consumer sector is expected to continue its spending patterns.

Conclusion

Overall, the economic outlook points towards solid growth in the coming year, driven by the resilience of consumer spending and continued investment in AI technologies, supported by fiscal policy. The baseline expectation is for an acceleration of growth from current levels.