AI Saves the Trump Economy The tech investment boom helps to offset damage from tariffs.

That’s the main story from Thursday’s first quarter GDP report, with AI-related investment driving most of the 2% growth. Meantime, the personal consumption expenditures (PCE) price index rose at an annual rate of 4.5%. You don’t need ChatGPT to tell you that President Trump’s tariffs are hitting consumers. (…)

The best news from the report is the 10.4% growth in business investment. Equipment purchases accounted for 0.88 points of the first quarter growth, nearly all of which came from information processing. Intellectual property contributed another 0.7 points, mostly from software. Big Tech and the AI boom can take a deep bow.

Google, Amazon, Microsoft and Meta this week reported a stunning $130 billion in capital expenditures during the first quarter as they built out AI data centers. That’s a 71% increase from last year. AI is spurring business spending on computer chips and servers, as well as downstream for electric power generating and cooling equipment.

No one knows when this music will stop, and which firms will emerge on top. But this much investment is bound to lift economic productivity sooner or later, which will mean wage increases for workers.

The AI investment boom and Mr. Trump’s tax cuts—especially the business expensing provisions—are helping to offset the damage from his tariffs. But tariffs are a tax, and taxes hurt growth. Mr. Trump’s willy-nilly imposition of border taxes has also fueled uncertainty, which makes it difficult for businesses to plan investments.

Tariff costs will vary by the particular business and individual, but most Americans are getting stung whether they know it or not. Our friends Michael Solon and Phil Gramm wrote in these pages this week that the $195 billion in new tariffs that were collected last year swamp the $188 billion that taxpayers will receive in lower federal tax liability for 2025 thanks to last summer’s tax cuts.

The 4.5% increase at an annual rate in the PCE index—the Federal Reserve’s preferred inflation measure—was also the most since the 2022 third quarter and up from 2.9% in last year’s fourth quarter. Don’t blame the war in Iran. The PCE excluding energy and food came in at an annual 4.3%.

Tariffs don’t cause general inflation, but they do lead to one-time price increases in the specific goods that are tariffed. To the extent tariffs reduce competition for domestic producers, they can also lead to more price increases down the road. Prices for most categories of goods increased last quarter, including for recreational goods and vehicles (20.4% annual rate), household furnishings (5.9%), and clothing and footwear (6.8%). These are subject to tariffs.

The inflation problem that Mr. Trump’s nominee for Federal Reserve Chairman, Kevin Warsh, will inherit is much broader, as evidenced by accelerating service prices, up 4.1% in the first quarter.

• AI Investment Boosted Economic Growth, While Consumers Tapped the Brakes GDP grew at a 2% rate in the first quarter, improving after shutdown-induced slowdown

(…) “Even after accounting for the fact that most computer equipment is imported, AI investment seems like it accounted for about half of the overall GDP growth in the first quarter,” said Oliver Allen, an economist at Pantheon Macroeconomics.

Imports of computer-related equipment in the latest quarter helped contribute to a 1.3-percentage-point drag on headline growth from net exports, which is the difference between what the U.S. sells to foreigners and what it buys.

Consumer spending, the economy’s main engine, rose at a 1.6% pace in the first quarter, slower than the 1.9% pace in the fourth quarter of last year. Americans shelled out more on services like healthcare, but their spending on goods declined slightly.

Some analysts still saw spending as solid, considering the shock at the fuel pumps following the launch of the Iran war and particularly bad winter weather. Also, the personal-consumption expenditures price index climbed to 4.5% in the first quarter, compared with an increase of 2.9% the prior quarter. (…)

The U.S. and Israel launched attacks on Iran on the last day of February, and the average price of regular gasoline has jumped about 44% since then. (…)

A measure of underlying demand in the economy strengthened thanks to the strong business investment, and despite uncertainties around the war in Iran and the Trump administration’s tariff policies.

That measure—known as final sales to private domestic purchasers—rose at a 2.5% rate in the first quarter, picking up from 1.8% in the prior quarter. It carves out the more volatile government, inventory and international trade data.

Spending by the federal government rose at a 9.3% rate, picking up strongly from a 16.6% contraction in the prior quarter. The fourth-quarter drag was due to the record-long government shutdown, which ended in November. (…)

The Capex Boom (via Ed Yardeni):

Capital spending indicators are red hot. Nondefense capital goods orders and shipments excluding aircraft hit fresh record highs in March, with both series in a strong uptrend since 2024.

Intellectual property (including software) and business equipment investment (including semiconductors and servers) both hit record highs in Q1-2026. They have been on strong uptrends since 2020, while structures continue to lag meaningfully behind.

Software, information processing equipment, and R&D also reached fresh record highs in Q1-2026. The pace of growth in information processing equipment steepened significantly recently amid the AI-driven investment boom.

High tech’s share of total nominal nonresidential capital spending surged to a record high of 55% in Q1-2026.

The recent drop in initial jobless claims suggests that the unemployment rate likely fell in April.

Both average hourly earnings and ECI wages & salaries have cooled significantly from their 2022 peaks and are now broadly converging near pre-pandemic norms.

Good thing if employment is improving (?) because wages and salaries rising only 3.3% per the ECI above means real labor income is now declining with inflation at 3.5% and rising broadly (goods = +3.8%, services = +3.4%)

The consumer is still 70% of the economy. Goldman Sachs now

forecast only 1.3% real income growth in 2026 on a Q4/Q4 basis, with growth of just 0.6% real income growth for the bottom income quintile. (…) and we forecast below-consensus real PCE spending growth of 1.3% in 2026 on a Q4/Q4 basis (vs. 2.1% in 2025). The saving rate declined by 0.3pp to 3.6% in March, but we forecast a slight increase to 4.1% by end-2026 and 4.7% by end-2027 on the back of a stronger precautionary saving motive due to labor market and geopolitical concerns.

An increase in the savings rate from 3.6% to 4.1% and to 4.7% is not “a slight increase”, especially when real income is slowing near 1% growth. Goldman sees headline inflation slowing rapidly towards 2% in 2027. Let’s hope…

Iran Is Grasping for a Solution to an American Blockade It Can’t Break Siege reveals hole in Tehran’s strategy of guerrilla warfare and controlling Strait of Hormuz

(…) Six weeks into the conflict, the U.S. responded by blockading shipments from all Iranian ports.

That shut down Iran’s network of shadow ships, which for years defied U.S. sanctions on Iran’s substantial oil exports by going dark at sea before clandestinely transferring their cargoes to China. The tankers have been unable to breach a cordon of U.S. warships that have chased them all the way to the Indian Ocean. (…)

Iran has been working to send some of its oil by rail to China and to import foodstuff by road from the Caucasus and Pakistan. Only 40% of Iran’s trade can be redirected away from blockaded ports, the Iranian Shipping Association said Thursday via the Fars news agency, which is affiliated with Iran’s security services. (…)

The Revolutionary Guard-linked Tasnim news agency recently published a map of undersea internet cables crossing the Strait of Hormuz in a veiled warning that the region’s telecommunications infrastructure could be targeted. (…)

Trump on Monday told aides to prepare for an extended blockade that could remain in place until Iran accedes to his nuclear demands. “The blockade is genius, OK, the blockade has been 100% foolproof,” he told reporters later this week.

Some 44 commercial vessels working for Iran have been ordered to turn around or return to port, U.S. Central Command, which oversees American military operations in the Middle East, said Thursday. There is no evidence any Iranian oil cargo has crossed the U.S. blockade and reached Chinese customers or other buyers, according to Kpler, a commodities-data company. (…)

Windward yesterday:

Maritime activity across the Strait of Hormuz increased on April 29, with higher transit volumes and broader corridor usage, while deceptive shipping practices continued to expand across the Gulf. Transit activity increased to 20 crossings on April 29, including 6 inbound and 14 outbound movements.

Transit flows rose to their highest level in recent days, with a notable return to the Southern Corridor alongside sustained outbound movement. At the same time, dark activity surged, indicating that increased volume is being matched by intensified evasion.

Outbound traffic included two tankers flagged to Curaçao and Palau, two bulk carriers flagged to Iran and Panama, and ten cargo vessels with four flagged to Iran, three to Comoros, and three to India.

Across adjacent areas, dark vessel movement persists through key chokepoints, while anchorage patterns near Bandar Abbas and Kharg Island reflect continued operational caution and constrained export dynamics.

The system is showing a clear split in behavior. Movement through the Strait is becoming more active and visible, while concealment, disruption, and non-cooperative activity are expanding across the wider region.

Overall, the system is becoming more active but not more stable. Movement is increasing, but so is complexity, with enforcement pressure, evasion strategies, and layered risks continuing to shape maritime behavior across the region.

In today’s WaPo (polled Apr. 24-28)

Trump signs order authorizing pipeline from Canada to Wyoming, potentially reviving parts of Keystone XL

U.S. President Donald Trump signed an order Thursday authorizing the construction of a new pipeline that would partly revive the route of the abandoned Keystone XL line, removing a major hurdle from a project that would transport more than 500,000 barrels of oil a day from the Canadian border to Wyoming.

Whether that will translate to a corresponding line in Canada is unclear, however, as oil companies mull over how much crude they want to send south – particularly as talks around a new pipeline from Alberta to the West Coast gain momentum. (…)

The permit signed by Mr. Trump on Thursday grants Bridger permission to construct, connect, operate and maintain pipeline facilities at the border.

The only infrastructure in Canada that could supply enough oil to the Bridger line is the partially constructed but long-dead Keystone XL system in Alberta. Work on the project was halted in 2021 after then-president Joe Biden revoked a key permit that had been issued by the previous Trump administration. (…)

Among industry, however, there is significant caution – if not outright skepticism – around whether the decree from Mr. Trump will actually lead to a pipeline being built, said Peter Tertzakian, deputy director of the ARC Energy Research Institute. (…)

While the permit signed Thursday removes a barrier for now, Mr. Tertzakian said in an interview, it’s not clear that it will be enough for producers to lock themselves in to long-term pipeline commitments and the tolls that accompany them.

“They’ve seen this movie before – they commit, then the whole thing gets axed with one pen stroke,” he said. “You would need to race to finish this thing, certainly before the 2028 [U.S.] elections.”

Alongside that skepticism is the question of whether oil producers even want to send their crude to the United States.

Canada’s federal government has pushed hard to diversify export markets away from the U.S. of late. That’s partly in response to Mr. Trump’s trade war, but in the case of energy, producers can also fetch a higher price for their oil by shipping to markets such as Asia.

The memorandum of understanding that Ottawa and Alberta signed in November, among other things, specified conditions for the construction of a new oil pipeline to the West Coast.

But if a producer commits large volumes to Prairie Connector or the Bridger expansion, Mr. Tertzakian said, they risk being unable to ship as much as they would like on other potential pipelines. That includes the new line to the coast being championed by Alberta, along with the Enbridge Mainline and Trans Mountain – both of which are expanding their transportation volumes.

If producers commit to a pipeline heading south, and then a line to the West Coast gets built, “they have to basically find the money to commit to the other,” he said. Given that filling a pipeline takes two to three times as much money as building one – and pipelines cost billions of dollars to construct – that’s a daunting prospect for any company, he added.

The Canadian K:

U.S. to Remove Tariffs on Scotch Whisky After King Charles-Trump Meeting President credits British royals for persuading him to lift the levies

A Crude Awakening on Inflation Is Hitting Markets Hope that the Iran conflict will end any time soon is being abandoned.

(…) Brent crude — the world’s most followed benchmark — topped $120 per barrel on Wednesday and closed higher than at any time during the conflict.

That drove a series of classic alarm bells across global markets, taking out closely watched landmarks. Bond yields surged, with 10-year gilts topping 5% for the first time since 2008; 30-year Treasury yields hitting 5% for the first time this year; and the Japanese yen over 160 to the dollar. These all suggest alarm about inflation. The war is at a tipping point where markets accept that it will seriously damage the global economy:

During the war’s first month, crude and the S&P 500 had a perfectly inverse relationship. During the second just ended, they rose together. The S&P hit a low when Brent logged its previous high on March 30. Since then, oil has reclaimed its peak, while the S&P rallied by 13%. (…)

Measures of volatility show that the amount people are paying to hedge future price moves in both equities and bonds are back where they were before the attack on Iran.

Polymarket now puts odds of only 52% on the Strait reopening by the end of June — implying we’re not even half way through the blockage. A protracted stalemate that creates shortages now looms as the likeliest outcome.

Two months ago, when the war was supposed to end in a matter of days, that would have been an unrealistically doom-laden scenario implying a bear market for stocks. Now it’s the base case. And stocks are up.

How to explain this? As Points of Return has covered, earnings expectations are behaving like a force of nature, and that is more important than anything else when pricing the stock market. (…)

Any discussion of cutting rates this year is moot. Futures markets no longer expect it, while the rate-sensitive two-year yield has surged with rate expectations. (…) On the war’s eve, three cuts were penciled in for 2026.

Meanwhile, the European Central Bank, due to make its own announcement shortly after you receive this, is in a tougher spot as Europe is more directly exposed to the conflict. In February, it was expected to leave rates unchanged all year. Now, traders are expecting three hikes, starting in June.

Trump wants rate cuts, but it’s hard to feel sorry. The impasse in the Strait has thwarted any chance of that, while his administration’s brutish attempts to interfere with the central bank appear to have robbed it of the chance to replace Powell with someone more amenable. The committee is now setting out its stall to behave like the Bank of England, where decisions come down to narrow majorities and the governor is sometimes in the minority. That’s not how the Fed has typically operated, but it’s a model that works elsewhere, and the bullying tactics are chiefly responsible.

Underscoring the point, Treasury Secretary Scott Bessent attacked Powell for staying on:

It’s highly unusual for someone who says he’s an institutionalist and cares about norms at the Fed. This is a violation of all Federal Reserve norms.

It’s hard to take this seriously. Weaponizing the prosecution system to to get rid of Fed governors you don’t like is a much greater violation of such norms. And the Fed’s building, currently being renovated so controversially, bears the name of Marriner Eccles — a highly respected chairman who stayed on as a governor once he left the chair, just as Powell is planning.

• Iran War Is ‘Supercharging’ the Energy Transition, UNFCCC Says

(…) Since the US and Israel attacked Iran on Feb. 28, the soaring price of oil and gas has forced governments across the globe to rethink their energy security policies. Earlier this month, the IEA said the ongoing conflict in the Middle East has already “thoroughly upended” the global outlook for oil consumption, as demand shows signs of permanently shifting to other sources of energy. (…)

There are now “so many governments [that] are pushing renewables plans into overdrive: to restore national security, economic stability, competitiveness, policy autonomy and basic sovereignty,” he said. (…)

Except in the USA.

• Eurozone inflation rises to 3% in April amid Middle East energy shock Economy’s 0.1% growth in the first quarter was slower than expected
• BoC holds rate at 2.25%, but warns of energy and trade risks
• On April 29, the nowcast of US real GDP growth in Q12026 is 1.2%:

Big Tech Strikes Gold With AI, but at a Steep Cost While Microsoft, Alphabet, Meta and Amazon ride AI to strong earnings, some investors are still worried about spending

Four of the biggest names in technology—Microsoft, Alphabet, Meta Platforms and Amazon.com —on Wednesday reported earnings showing that sales are growing thanks to the proliferation of AI tools. That progress, however, comes at a steep cost. Capital expenditures on the infrastructure needed to satisfy demand are climbing steadily higher.

Microsoft, Alphabet, Meta and Amazon last year combined for $410 billion in capital expenditures and are expected to spend more than $670 billion on capex in 2026, according to a Wall Street Journal tally. Morgan Stanley estimates that tech companies will spend $2.9 trillion on chips, servers and other pieces of data-center infrastructure between 2025 and 2028.

The costs of those inputs, which keep the AI engine humming, keep rising. Prices for memory chips (…) have skyrocketed as surging demand for AI tools has caused a shortage. There are demand-driven capacity crunches in everything from fiber-optic cabling to electric power to water for cooling chip factories to undeveloped land for data centers. (…)

Wednesday’s results highlighted a bifurcation in Big Tech between the fortunes of companies that have invested heavily at several levels of the AI stack, including design of cutting-edge microchips, cloud services and models, and those that are more reliant on partners for hardware or services that they or their customers need.

Alphabet posted the strongest quarterly results of the four, reporting an 81% increase in net income compared with a year earlier. Its Google Cloud unit, which rents out access to its in-house AI chips, known as Tensor Processing Units, posted $20 billion in first-quarter revenue, a 63% year-over-year increase [vs +60% in the prior quarter]. Chief Executive Sundar Pichai said that AI is “lighting up every part of the business.”

The company’s remaining performance obligations, or backlog of customer commitments, almost quintupled year over year to $460 billion [and up 92% from $240B last quarter], largely on the strength of cloud sales. [GOOG expects to record about half of the backlog as revenue over the next 2 years. That would be $30B per quarter on average]

In a major shift, Pichai announced that Google would begin direct sales of TPUs to a select group of external customers, the company’s first significant step to commercialize its chips outside its own cloud business. Alphabet raised its capex projection for 2026 by $5 billion [+3%] to a new range of $180 billion to $190 billion, a result of its recent acquisition of the data center energy provider Intersect.

Alphabet shares rose 7% in aftermarket trading.

Amazon, which has been rapidly expanding its in-house custom silicon business, saw income at its Amazon Web Services data-center segment surge 28% year over year, to $37.6 billion. (…)

The company’s shares rose 2.7% in after-hours trading, despite reporting that it had spent $59.3 billion more on property and equipment, mostly related to its AI investments, than in the year-earlier quarter. That left the $2.8 trillion company with just $1.2 billion in annual free cash flow, much lower than was typical in the years leading up to the AI boom.

[Amazon said its contract pipeline had reached $364bn at the end of March and would expand further due to a recent $100bn computing contract with Anthropic.(FT)]

Meta shares fell about 7% after the market close despite big gains in ad revenue it attributed to AI-driven improvements in ad targeting and tracking. The company far exceeded analysts’ expectations for both quarterly sales and net income.

The social-media company told investors that it expected capital expenditures of between $125 billion and $145 billion in 2026, up [~8%] from a previous estimate of $115 billion to $135 billion. The increased spending projection is due to “expectations for higher component pricing” and “additional data center costs,” the company said.

Meanwhile, Microsoft beat Wall Street’s expectations for sales, earnings per share and operating margins, but shares still declined after the bell and were later little changed. The company’s Intelligent Cloud unit, which includes its AI infrastructure and Azure cloud computing businesses, reported $13.2 billion in operating income, lower than the $14.1 billion predicted by analysts surveyed by FactSet.

On an earnings call with investors, Microsoft Chief Financial Officer Amy Hood said the company expects to increase capital spending to $190 billion for all of 2026, with $25 billion of that reflecting higher-component pricing. Hood said despite rising costs, she was optimistic these investments would pay off once the company gets more infrastructure in place.

“I feel quite good about our ability to work through the physical sort of limitations, [broad and growing customer demand continues to exceed supply]” Hood said. (…)

Microsoft said Copilot now has 20 million paid users, up 33% since January. Growth in the company’s Azure cloud business reached 40%, in line with expectations, and its capital spending was about $31.9 billion, more than 8% lower than projections.

[MSFT forecast 13% to 15% revenue growth in the June quarter vs +18% in Q1].

[Hood also said: “Even with these additional investments, and continued efforts to bring GPU, CPU and storage capacity online faster, we expect to remain constrained at least through 2026.” Hood added that cloud growth would accelerate in the second half of the year as more data centres come online.” (From the FT which also supplied the revenue growth chart above)

“The moral of the story is, cloud businesses are accelerating, and you’re seeing particular strength behind vertical integration,” said John Belton, portfolio manager of the $1.4 billion Gabelli Growth Fund, which has about 30% of its holdings in Alphabet, Amazon, Meta and Microsoft.

“That means,” he said, “if you’re a cloud services company, and you have a full suite of computing services, from the chip down to the model, down to the application, you’re doing much better, versus if you’re just building data centers and running more third-party models.”

• Samsung Chip Profit Surges on AI Demand, Pricing Power in Focus Samsung Electronics’ semiconductor unit beat expectations with a 48-fold profit jump, driven by strong margins from AI-related memory demand. Heavy spending by hyperscalers such as Meta Platforms and Alphabet is supporting high-bandwidth memory growth, with analysts pointing to sustained pricing strength amid tight supply. Counterpoint Research expects DRAM contract prices to rise 60% quarter-on-quarter in Q2 after a 42% increase in March. (MKT News)

LIQUIDITY “ISSUES”

It’s not just credit…

Private equity backers raise new conflict concerns over sweetheart deals

Big private equity backers have raised concerns that some of their peers may be waving through controversial deals where buyout firms sell companies to themselves, adding a fresh twist to worries about conflicts of interest inherent in the transactions. (…)

Some large private capital firms invest in traditional buyout funds and also have secondaries businesses that back continuation vehicles — the dedicated entities set up by buyout firms to purchase assets from their older funds.

The head of investor relations at a large international buyout group said that certain US pension plans were now objecting to procedures whereby just a small committee of a fund’s backers tend to vote through the sale of one or more portfolio companies to a continuation vehicle.

There have long been worries about whether private equity firms themselves could be conflicted when a continuation vehicle buys an asset from one of the manager’s older funds. But investors in the selling funds are now questioning whether their peers have potential conflicts in deciding whether assets should be put into continuation vehicles.

The rise of continuation vehicles, which accounted for roughly a fifth of all private equity exits last year, and the growing pool of money dedicated to supporting such transactions have underlined concerns about occasions where private equity fund investors could find themselves on both sides of a transaction.

Some institutional investors are demanding that a wider group of fund backers be required to approve selling assets to continuation vehicles, the private equity executive said. (…)

The US pension plan told the FT that “limited partner advisory committees are becoming increasingly conflicted”, referring to the industry term for backers of buyout funds. They added that when committee members’ employers also had strategies dedicated to backing continuation vehicles, “it’s hard to know which interest they’re serving”. 

Private equity groups have turned to continuation vehicles in recent years, either to avoid selling companies at lower valuations in a difficult economic environment or to stay exposed to their best-performing assets. 

Last year there were more than $100bn of sales into continuation vehicles globally, up from about $70bn the year before. This compares with $7bn or less in 2015, according to Jefferies. (…)

Investors in a fund selling assets to a continuation vehicle are typically invited to cash out their stakes or reinvest in the new vehicle, usually after the buyout firm has completed a bidding process with third parties to set the price. 

The US pension plan executive suggested that bidders could offer to pay higher management or performance fees in a new fund “in exchange for a cheaper price” on the continuation vehicle. (…)

Why Powell Is Right to Stay on at the Fed His presence raises the stakes should Trump renew his attacks on the central bank’s independence

If these were normal times, Jerome Powell would have just finished his last-ever Fed meeting. He would relinquish his chairmanship next month to Kevin Warsh, as well as his separate seat as governor.

But these are not normal times, and the country is better served with Powell as a governor than as a private citizen.

President Trump has waged a year-long campaign to bend the Fed, which is supposed to be independent, to his will. That culminated in his Justice Department launching a criminal investigation of Powell on the barely credible allegation of misleading Congress about cost overruns on Fed-building renovations. (…)

On Wednesday, Powell said he would stay on as governor after his chairmanship ends May 15, “for a period of time to be determined.” His term as Fed governor ends in early 2028. (…)

How does his presence affect whether Trump’s prosecutors continue to pursue him? (…)

But prosecutors enjoy extraordinary discretion and nothing stops Pirro or some other prosecutor from reopening that investigation or launching a new one.

“In general, if you’ve decided you’re going to drop a case, you wouldn’t reopen it unless you came across some substantial additional evidence that caused you to change your mind,” said Randall Eliason, a former federal prosecutor specializing in public corruption and a retired law professor. But “this Justice Department has shown little concern about following standard rules, procedures and protocols. If I’m Powell, I might be concerned this is just a temporary thing to grease the way for Warsh’s confirmation and then they’ll bring it right back.” (…)

And Trump has gone to great lengths to exact retribution on his perceived adversaries long after they’ve left office. (…)

If Powell stays, the Justice Department would not be pursuing a private citizen but a sitting central banker, raising the stakes. Powell could make a potent political and legal case that this was a naked attempt to control monetary policy. The Supreme Court has already signaled reluctance to let Trump fire Cook over concerns about Fed independence. (…)

Warsh has an interest in defending the Fed’s systems and governance against political attack. Nor should he welcome the prospect that Trump, or some future Democratic president, could similarly manufacture a pretext to remove Warsh because they clashed over monetary policy.

There is, of course, the larger question of what Powell’s presence means for interest rates. If he leaves, Trump can fill his seat with his own appointee, providing one more vote to lower rates or potentially take more drastic steps like removing reserve bank presidents. Trump’s critics want Powell to stay precisely to prevent that. (…)