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