AI Is Booming. Growth? Not Quite So Much.

David Halseth
Aug 2
2 min read

For the week ended 8/1/26.

Artificial intelligence may be reshaping the economy, but in the second quarter, it also performed a rather convincing disappearing act on GDP.

The U.S. economy expanded at a 1.5% annualized rate, down from 2.1% in the first quarter and below economists’ expectations of 1.8%. A major culprit was surging imports – particularly semiconductors and other components needed to fuel the AI build-out. Imports are subtracted when calculating GDP because they are produced elsewhere, even when they support investment here at home.

In other words, AI is simultaneously powering the economy and making the headline growth number look worse. Economists do enjoy making simple things complicated.

Beneath the headline, the report was more encouraging. Consumers increased spending despite gasoline prices jumping amid the conflict with Iran. Business investment also remained strong as companies continued pouring money into information-technology equipment and software. The AI spending boom clearly remains intact; America simply doesn’t manufacture enough of its ingredients.

Meanwhile, the Federal Reserve voted 9–3 to hold its benchmark rate at 3.5%–3.75%. Three regional Fed presidents dissented in favor of a quarter-point increase, arguing that inflation has remained above the Fed’s target for five years.

Chair Kevin Warsh again emphasized the need to bring inflation under control – but investors heard more talk than imminent action. The two-year Treasury yield fell following his press conference, suggesting markets pushed their expectations for a rate increase further into the future.

Long-term bonds were considerably less relaxed. The 30-year Treasury yield jumped 0.136 percentage point to 5.228%, its highest level since 2007. That divergence sends an uncomfortable message: investors may believe the Fed will remain patient, but they are demanding considerably more compensation to lend money for three decades.

For the week, foreign stocks led with a 1.9% gain, followed by U.S. stocks at 1.1%. Real estate fell 2.3%, commodities lost 2.1%, and U.S. bonds slipped another 0.1%. Year to date, commodities remain the leader at 23.0%, followed by real estate at 16.9%. Bringing up the rear – you guessed it – are U.S. bonds, down 0.7%.

This week brings a parade of PMI and inflation reports, culminating Friday with July employment and nonfarm-payroll data.

Stay frosty in the heat – and don’t expect the bond market to do the same.