Tailwinds for US and global economic growth

Key Concepts

• AI Tailwinds: Artificial Intelligence driving economic growth.
• Data Centers: Facilities housing computing infrastructure, a major driver of AI-related growth.
• Tariffs: Taxes on imported goods, discussed in the context of their impact on manufacturing.
• K-Shaped Economy: An economy where different sectors or income groups experience divergent recovery paths.
• Narrowness of Growth: Economic expansion concentrated in specific sectors or among certain demographics, rather than being broad-based.
• Policy Unpredictability: Uncertainty surrounding government policies impacting business investment.
• Affordability Crisis: Rising costs of essential goods and services, including electricity.
• Digital Infrastructure Build-out: Expansion of technological infrastructure, particularly data centers.
• Clean Tech: Technologies focused on environmental sustainability (solar, wind, EVs, batteries).
• Property Overhang: Lingering issues in the real estate sector impacting economic growth.
• Emerging Markets (EM): Developing economies.
• Labor Force Transformation: Changes in employment patterns and job roles due to technological advancements.
• Productivity: The efficiency with which labor and capital are used to produce goods and services.

S&P Global Ratings Economic Outlook Q1 2026

S&P Global Ratings projects that Artificial Intelligence (AI) will act as a significant tailwind, boosting otherwise subdued economic growth in the first quarter of 2026.

US Economic Outlook: Growth and Contributing Factors

• Projected Growth: The outlook for the US is 2% growth.
• Historical Trend: Over the past couple of years, economic expectations have consistently been revised upwards from initial forecasts.
• Tariff Impact: Initial concerns about tariffs leading to a recession were not fully realized. Tariffs were lower than anticipated, with minimal retaliation from other countries, and their pass-through effects were moderate and took time to materialize.
• Current Tailwinds:
  • AI and Data Centers: Significant investment in AI and the construction of data centers are major growth drivers.
  • Lower Energy Prices: Reduced energy costs are contributing positively.
  • Easy Financial Conditions: Favorable financial conditions support economic activity.
• AI's Contribution:
  • Quantification: While a direct measure is unavailable, AI is estimated to contribute at least half a percentage point of annual growth.
  • Domestic Spending: Approximately 80% of domestic spending in the early part of the year was attributed to AI and data centers.
• Underlying Weakness: Excluding AI and data centers, the labor market appears weak, and economic expansion is narrow. This suggests AI is providing a substantial, albeit concentrated, boost.
• Manufacturing Contraction: The manufacturing sector continues to experience contraction, with the Institute for Supply Management (ISM) reporting the 10th consecutive month of contraction.
• Tariffs and Reshoring: Tariffs have not led to the expected reshoring of manufacturing. Instead, there are losses in manufacturing and government employment.
• Policy Unpredictability: Ongoing policy uncertainty is dampening manufacturing output and other economic activities.
• K-Shaped Economy and Narrowness: The economy exhibits a "K-shaped" recovery, characterized by a narrow base of growth.
  • Labor Market: Strength is concentrated.
  • Demand: Demand is narrow.
  • Manufacturing: The sector is weak.
  • Consumer Spending: Spending is relatively narrow, with the top 10% of earners accounting for roughly 40-50% of spending. This lack of broad-based recovery is not seen as sustainable long-term but is currently boosting the headline growth rate.
• Catalysts for Broadening:
  • Tax Bill: Changes to the tax bill are expected to help.
  • Lower Energy Bills: Further reductions in energy costs will be beneficial.
  • Data Center Dispersion: Data centers are spreading geographically, potentially creating broader localized economic activity.
• Manufacturing Revival: A significant return of manufacturing akin to the 1950s is not anticipated.
• Energy Costs and Electricity Prices:
  • Gasoline vs. Electricity: While gasoline prices are lower, electricity costs for households are not.
  • Affordability Crisis: Rising electricity costs are a significant factor in the current affordability crisis.
  • Demand Increase: Electricity demand, which had been flat for years, is now increasing due to factors like data centers.
  • Utility Price Increases: The surge in demand from data centers is pushing up utility prices, leading to higher electricity bills for local communities.
  • Distributional Issues: This highlights ongoing distributional challenges, where technological advancements create benefits but also impose costs on specific communities.

Global Economic Outlook

• Modest Global Growth: The global economic outlook is described as "okay" with modest growth.
• Europe and Asia: These regions are benefiting from the digital infrastructure build-out in the US, particularly through exports of high-end tech products.
  • Benefiting Countries: Ireland, Taiwan, Malaysia, and South Korea are mentioned.
  • European Growth: Europe is expected to grow between 1.25% and 1.5%, supported by infrastructure and defense spending, especially with the release of the German debt brake. Expectations for Europe need to be scaled appropriately.
• China:
  • Strengths: China is a leader in clean tech (solar, wind, EVs, batteries).
  • Challenges: The country faces a property overhang, leading to an estimated growth rate of around 4-4.5%.
• Emerging Markets (EM):
  • Tailwind from Energy Prices: EMs are benefiting from lower energy and gasoline prices, which constitute a significant portion of their consumption basket.
• Overall 2026 Outlook:
  • US: ~2%
  • Europe: ~1.5%
  • Asia: ~4%

AI and Labor Force Transformation

• Short-Term Impact: The immediate impact of AI on the labor force is expected to be negative, with potential layoffs already being observed, particularly in the tech sector.
• Long-Term Aspiration: The hope is that new technologies and ways of working will emerge, leading to a "labor renaissance" characterized by increased productivity.
• Areas to Watch:
  • Macro Payoff: The broader economic benefits and productivity gains from AI.
  • Financial Payoff: The impact on corporate earnings.
  • Labor Supply/Demand: The net effect on employment.
• Clarity: More clarity on both the macro and financial payoffs is expected in the coming years.