The Trump economy isn’t great, but it’s soldiering along. Take artificial intelligence out of the equation, however, and we’d have a flatlining economy verging on recession.
GDP grew at a 1.6% rate in the first quarter and it might do the same or a little better in the second quarter. That’s decent. The unemployment rate is 4.3%, not the lowest ever but below the average of the last 25 years.
Almost all the growth, however, is coming from the artificial intelligence buildout. Of that 1.6% growth in the first quarter, 1.5 percentage points came from AI alone. And those segments account for just 13% of the economy, which may make the current Trump economy one of the most lopsided in decades.
“Outside of AI, there is zero vitality in the US economy,” economist David Rosenberg of Rosenberg Research wrote in a June 1 analysis. “The AI euphoria is masking a narrowing market and a weakening economy.”
[See 5 rules for managing AI]
Rosenberg estimates that the traditional drivers of economic growth—housing, construction, non-AI business investment and services—are contracting. That means most of the economy is in a recession, masked only by the outsized spending on AI.
The same thing is happening in the stock market, where an epic boom in semiconductors, driven largely by insatiable demand for AI hardware, accounts for essentially all of the dizzying gains of recent months.
The Iran war that began on February 27 sent stocks lower for a month, as investors weighed the damage soaring energy prices might cause. But a rally began at the end of March that has propelled the S&P 500 index 20% higher since then.
It’s all AI. Goldman Sachs stripped AI stocks from the S&P and found that without them, the index would still be lower than it was when the war started. The 20% rally came from blockbuster profits at companies selling the gear AI requires, which pushed war concerns to the sidelines and compelled investors to get in on the action. Without AI, that 20% rally wouldn’t have happened.
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The AI boom isn’t fake. Unlike the dot-com boom and bust of the late 1990s, the AI economy is led by established companies such as Google, Nvidia and Amazon that are deeply profitable. Stock prices are rising because real profits are soaring, not because investors hope the AI darlings will become profitable one day. The stock values of big AI names could fall, but the companies aren’t going to go bust.
Most Americans, however, don’t live in the AI economy. They live in the traditional economy, the other 87%, where growth is anemic and there are ample signs of stress.
Inflation has now hit 3.8%, while wage growth has dipped to 3.6%, the first time price hikes have outpaced wage growth since 2023. That means the typical worker is falling behind, with the average paycheck buying less.
The savings rate has fallen to the lowest level since June 2022, which is when post-Covid inflation peaked at 9%. The savings rate typically falls when inflation rises and consumers need to draw down their bank accounts to keep up with rising costs.
[Markets to Trump: End the Iran war!]
An obvious stressor is the price of gasoline, which has jumped to around $4.30 per gallon since Trump’s Iran war throttled global oil supplies. That’s a 45% price hike from pre-war levels.
Americans feel lousy. The University of Michigan’s sentiment index is at the lowest levels in survey data that goes back to 1952. Another confidence index, maintained by The Conference Board, isn’t at record lows, probably because it puts less emphasis on inflation than Michigan’s does. But it’s still near the lowest levels since the 2020 Covid downturn.
Where would we be without AI? It’s possible businesses would be investing in something else, but probably not with the vigor they feel toward AI. Most likely, the economy would be close to stall speed, with unemployment higher and stocks considerably lower. Maybe the Federal Reserve would be enacting monetary stimulus instead of contemplating interest rate hikes.
Trump’s approval ratings have plunged, as his tariffs and Iran war drive prices higher for ordinary Americans. But without AI, unemployment would probably be higher, stocks lower, and Trump even deeper in the hole.
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