AI Capex, High-Income Spending Lift US Q3 GDP Forecast to 2.5%

Economists lifted their US third-quarter GDP forecast to 2.5 percent from 2 percent, a Bloomberg survey of 85 economists showed, as AI-related capital spending and high-income household consumption offset a cooling labor market.

"Technology and AI-related investment are the main drivers of stronger business capital spending, while high-income households account for most of the consumption gains," James Knightley, chief international economist at ING, said.

The upgrade comes as inflation cools and rate-hike expectations fade. Economists now see the Federal Reserve holding its benchmark rate at 3.50 percent to 3.75 percent until July 2027, with market pricing for a September increase falling below 50 percent. Core PCE inflation is projected to average 3.2 percent this year, easing to 2.5 percent by 2027, while monthly nonfarm payroll growth is forecast to slow to 66,000.

The stakes are concentrated in the AI capex cycle. Bloomberg Intelligence estimates global AI-related capital spending will exceed $1 trillion this year and reach $1.5 trillion by 2027, making the investment boom the swing factor for growth. Yet economists kept 2027 quarterly forecasts in a narrow 2 percent to 2.2 percent band and flagged an escalation of the Iran conflict as the primary downside risk — one that could push oil and consumer prices higher and force the Fed into a policy bind.

The survey, conducted Aug. 14-19, reflects a growth picture that is increasingly two-speed. Business investment is being carried by the AI buildout, with data-center and semiconductor spending leading the way. On the consumer side, gains are concentrated among high-income households, leaving lower-income groups contributing relatively little to demand — an imbalance that ties the expansion to asset prices and corporate profits rather than broad wage growth.

The labor market is cooling in step. Economists cut their forecast for average monthly nonfarm payroll gains this year to 66,000, a level that historically signals a softening jobs market. That slowdown reinforces the view that consumption momentum is narrowing toward the top of the income distribution, even as the headline growth forecast was raised.

Cooling Inflation Erodes the Case for a September Hike

The inflation path is the other pillar of the revision. Core PCE — the Fed's preferred gauge — is seen averaging 3.2 percent in 2026 and drifting down to 2.5 percent by 2027, still above the central bank's 2 percent target but trending in the right direction. July data reinforced the softening: headline CPI eased to 3.4 percent, retail sales fell 0.6 percent, and the employment report showed unexpected job losses.

That combination has reshaped rate expectations. Markets now price roughly a two-thirds probability the Fed holds in September, down from better-than-even odds of a hike a week earlier. New Fed Chair Kevin Warsh, who took office in May, has withdrawn forward guidance, leaving the July FOMC minutes — released Wednesday on a 9-3 vote with three dissents favoring a 25-basis-point hike — as the main window into how far hawkish sentiment extends.

Iran Conflict Is the Swing Risk

The principal threat to the base case is external. Economists flagged an escalation of the Iran war as the main downside risk to US growth, with the potential to push oil and consumer prices higher. Brent crude has already climbed to $92 a barrel, and the 30-year Treasury yield touched 5.338 percent — a 19-year high — as fiscal and inflation concerns weigh on the long end.

If the conflict deepens, higher energy costs would feed directly into inflation expectations, keeping the Fed tight even as growth slows. That combination — stagflationary pressure from the supply side — would force policymakers to choose between tolerating inflation and accepting weaker output. The survey's baseline remains optimistic, but the geopolitical variable is the one most likely to break it.

For markets, the forecast upgrade and fading hike odds are a net positive for risk assets, particularly AI-linked equities that benefit from the capex cycle. But the narrowness of the growth base — concentrated in AI investment and high-income spending — leaves the expansion exposed if the capex boom stalls or the Iran conflict escalates. The next test comes Aug. 26 with July PCE, followed by Warsh's Jackson Hole keynote Aug. 28 and the Sept. 15-16 FOMC meeting.

This article is for informational purposes only and does not constitute investment advice.