In most of our collective experience, economic narratives have been straightforward. Industrialization led to expansions that benefitted consumers and businesses alike. Recessions were associated with broad decreases in consumer spending that touched nearly every business sector.
That coherent story of consumer and business spending moving in concert with each other is less true in today’s economy. The story is splitting into two narratives. One narrative is playing out in household budgets. Consumer discretionary spending took a double hit early in the decade from the COVID-19 recession and the inflation that followed. Consumer sentiment fell to levels not seen since the late ‘70s, lower than during each of the last four recessions. The oddity was that the actual low point in the University of Michigan’s Index of Consumer Sentiment (at that time) was in 2022—during the recovery. The problem is that sentiment never recovered to pre-COVID levels, and even fell further since 2022 and now sits at its lowest level since the survey began in 1952.
If you could time-travel to the 1980s or ‘90s to show the current headlines on consumer sentiment to economists from that time, they might ask if we were currently going through a severe recession. Yet, by the profession’s standards, we are not in a recession at all. Part of the reason is that there is a parallel narrative that appears to be operating completely independently from the consumer narrative.
That is, of course, the boom in AI infrastructure spending. The big shift in spending on AI began just before the COVID recession and was only slightly affected by it. Beginning in 2021, growth rates for investment in intellectual property products (which captures much AI investment) were in double-digits for six quarters in a row. This spending shows no sign of letting up as this measure was again in the double-digits for two of the most recent four quarters. It’s not unprecedented, but we have not seen this pace of growth of spending in this category since the late ‘90s.
The AI investment story hinges on the tremendous optimism that AI adoption will lead to productivity gains for years into the future. The consumer sentiment story is based on labor market uncertainty and the recent re-emergence of inflation. The narratives point in opposite directions, and the result of these forces coming together is economic growth that looks red-hot from one point of view and barely getting along from another point of view.
