The U.S. economy continues to expand, though not without growing strain, according to the most recent Federal Reserve Beige Book. While official government data has been disrupted by a prolonged shutdown, anecdotal evidence from businesses across the country paints a picture of an economy increasingly reliant on artificial intelligence investments to maintain momentum. Without the boost from AI-related spending, economic growth could be nearing stagnation.
Among the twelve Federal Reserve districts, economic performance varies: two report modest declines, one shows modest growth, and the rest fall somewhere in between. Consumer spending overall is weakening, particularly among lower- and middle-income households. Retailers in Philadelphia observed that middle-class shoppers are now behaving similarly to those with lower incomes—opting for cheaper alternatives, avoiding non-essentials, and relying heavily on discounts. In contrast, high-end markets remain resilient. New York’s luxury retail and Hamptons real estate sectors continue to thrive, with affluent buyers using cash or alternative financing, while others delay purchases.
Residential construction shows mixed results—down in some areas, flat in others. Agriculture and energy sectors are stable, though low commodity prices are squeezing profit margins. Employment has dipped slightly, with companies favoring hiring freezes and natural attrition over layoffs. Some firms noted that AI tools have enabled them to avoid filling entry-level roles or replacing departing staff.
Inflation remains moderate, but businesses face rising costs in areas like tariffs, insurance, healthcare, utilities, and technology. These pressures are leading to margin compression, even from historically high levels. Manufacturing has seen a slight uptick, primarily driven by AI infrastructure projects and data center development. Demand for components and equipment related to data centers is expanding rapidly, according to Cleveland Fed contacts. However, this growth masks broader weakness—many producers describe a “collective holding of breath,” as AI construction is now the primary source of sustained demand.
San Francisco reports a similar trend: new commercial construction is heavily concentrated in data centers, with little activity elsewhere. Capital expenditures in automation are rising, especially in projects that improve efficiency without increasing headcount. Chicago notes stronger sales in machinery and capital goods, reflecting a shift toward productivity-enhancing investments.
The overall economy avoids recession for now, but appears more fragile than headline GDP figures suggest. Middle- and lower-income consumers are cutting back on discretionary spending and relying more on social support programs. Manufacturers depend increasingly on AI-driven demand as other markets weaken. Credit conditions remain stable overall but show signs of deterioration at the edges.
Since late 2022, when generative AI entered the mainstream via ChatGPT, its impact has been significant. Researchers at the St. Louis Federal Reserve estimate AI tools may have boosted labor productivity by up to 1.3 percentage points. In the first half of 2025, AI-related capital investment contributed 1.1 percent to GDP growth—surpassing consumer spending as the main growth driver, according to JP Morgan. This does not include the additional 1.3 percent from productivity gains.
Investors often compare today’s AI-driven market rally to the dot-com boom. Using the Nasdaq 100 as a proxy, the index rose 54 percent in 2023, 25 percent in 2024, and 21 percent year-to-date in 2025—totaling a 111.5 percent gain over three years, or about 28 percent annualized. While strong, this is below the peak frenzy of the late 1990s. After Netscape’s 1995 IPO, the Nasdaq 100 gained 122.4 percent over three years, or 30.5 percent annually. The real bubble emerged later, when valuations far outpaced earnings.
From 1999 to 2003, the Nasdaq 100 more than doubled in 1999 alone, only to lose 80 percent of its value by 2002. Even after a 49 percent rebound in 2003, investors who bought in 1999 were still down 20 percent five years later. Today’s trajectory resembles the 1996–1998 period—robust but supported by real investment and productivity—rather than the speculative mania of 1999–2000. The Beige Book’s evidence of tangible spending on data centers and automation supports this more grounded interpretation, though it also highlights growing economic concentration and vulnerability.
— news from The Berkshire Edge
— News Original —
CAPITAL IDEAS: Will the economy crack in 2026? Or will the AI boom save It?
The federal government is still digging out from weeks of shutdown, and the usual flow of economic data remains disrupted. Some private data has certainly filled the void, but, overall, when data fails us, we can rely on well-sourced anecdotes. The stories told by businesses in the Federal Reserve’s most recent Beige Book (formally known as “Summary of Commentary on Current Economic Conditions by Federal Reserve District”) are the closest thing we have to a real-time, on-the-ground survey of how the economy is doing. n nThe latest edition of the Beige Book describes an economy that is still expanding, but not comfortably so. Absent the lift from the artificial intelligence boom, the U.S. economy would be dangerously close to falling flat, or worse. Do we need to worry about the AI lift being taken away? Or should we rejoice that it’s here? n nBig picture: Slow grind, worse tone n nOf the dozen Federal Reserve districts, two report modest declines, one modest growth, and the rest somewhere in between. Overall, consumer spending continues to slip, while higher-end retail remains solid. n nAcross districts, low-income consumers have been pulling back all year; now, contacts say the same behavior is spreading to the middle class. One Philadelphia retailer noted that middle-income households are starting to look a lot more like low-income households at the checkout line: trading down, skipping extras, and leaning harder on discounts. n nMeanwhile, the high-end consumer is still living in a different world. New York reports that luxury retail and the Hamptons housing market remain strong, with wealthy buyers paying cash or using alternative financing while more leveraged buyers sit on the sidelines. Chicago notes that retail corridors catering to higher-earning consumers are thriving, while value retailers also see solid traffic from everyone else trading down. n nResidential construction is off in some districts and flat in others. Agriculture and energy are described as “largely stable,” though low prices are weighing on margins. n nEmployment has declined, with many firms using hiring freezes and attrition rather than outright layoffs. A few contacts explicitly said that AI deployments allowed them to skip hiring entry-level workers or to forgo refilling vacancies. n nPrices are rising at a moderate pace, but not in a way that feels comfortable to businesses. Tariffs, insurance, healthcare, utilities, and technology all show up as cost pressures. Margin compression is evident across multiple districts, albeit from high levels. n nManufacturing and capex: AI keeps the lights on n nManufacturing has ticked up “somewhat,” helped by AI-related investment and data center construction, but nonfinancial services are mostly flat to down. Several districts report modest increases in factory output and new orders, with strength in capital goods and anything tied to automation. Chicago notes a pickup in machinery sales and says firms are increasing capex, especially on automation that does not require corresponding increases in headcount. n nCleveland highlights a very specific growth driver: AI data centers. Producers of components and equipment for data centers say demand is “rapidly expanding.” At the same time, one contact described a “collective holding of breath” because AI construction is now the main thing keeping their order books full while other segments remain soft. San Francisco echoes that pattern on the construction side: New commercial buildings are “concentrated” in data centers, with much less activity elsewhere. Without that AI capex, the factory side of the economy would look a lot weaker. n nBottom line: Not a recession, but more fragile n nThe November Beige Book does not scream recession. It does, however, describe an economy that is more fragile than the GDP print suggests: n nConsumers outside the top income brackets are trading down, pulling back on travel and “extras,” and leaning harder on safety net programs. n nManufacturers are increasingly dependent on AI-related demand, even as other end markets weaken. n nCredit quality is still OK, but clearly deteriorating at the margin. n nIf the AI boom weren’t happening, I suspect we would be heading toward a growth scare, or something worse. n nSo how much has AI “juiced” the economy since ChatGPT introduced generative AI to the mainstream in late 2022? Researchers at the St. Louis Fed estimate that generative AI tools may have raised U.S. labor productivity by up to about 1.3 percentage points since late 2022. Over time, GDP tracks the growth rate of prime-age employment plus the productivity growth rate. n nIn the first half of 2025, AI-related capex contributed 1.1 percent to GDP growth, outpacing the U.S. consumer as an engine of expansion, according to JP Morgan. And that is not even including the 1.3 percent from the productivity boom. n nAI and the stock market: This cycle vs. Netscape’s n nChatGPT exploded into the zeitgeist three years ago, on November 30, 2022. Investors naturally want to know whether the last three years of AI-driven market gains are a déjà vu of the late 1990s dot-com bubble or something more sustainable. n nLet’s use the Nasdaq 100 as a stand-in for the “AI winners” today, just as it captured the core of the 1990s tech boom. n nThe last three years (post-ChatGPT era) n nFrom the start of 2023 through late 2025, the Nasdaq 100 has posted calendar year total returns of about plus 54 percent (2023), plus 25 percent (2024), and plus 21 percent year to date in 2025. It was up 111.5 percent over the three years following November 30, 2022, roughly 28 percent compounded annually. For a three-year stretch, that is fantastic. But it is not unprecedented, and it is still below the truly manic phase of the dot-com era. n nThe three years after Netscape’s IPO (1995–1997) n nNetscape went public in August 1995, after being released on December 19, 1994. The Nasdaq 100 returned roughly 122.4 percent after its launch, an approximately 30.5 percent annualized rate. n nBespoke compiled the three-year returns following the previous major technology releases over the last 50 years. n nBy comparison, today’s AI era run-up is similar but still milder than the three-year rocket ride that preceded the 1999–2000 blow-off, when it soared 104 percent in less than 15 months. The stock market in the 1990s became a bubble not because it doubled, but because it doubled twice, and the pace of stock price growth outpaced earnings growth. n nWhat happened next in the 1990s? n nThe following five years after that (1999–2003) are a useful cautionary tale: n n1999 alone saw the Nasdaq 100 more than double to its March 10, 2022, peak, with a 104 percent gain. n nThen the bubble burst. From the March 2000 peak to the 2002 low, the index lost roughly 80 percent of its value. n nEven after a 49 percent rebound in 2003, an investor who bought the Nasdaq 100 at the start of 1999 was still down about 20 percent five years later. n nThe lesson is not that this cycle must end the same way. It is that three great years in growth stocks do not automatically mean “bubble.” Right now, the AI era looks more like the 1996–1998 track (strong but still grounded in earnings, capex, and real productivity) than the 1999–2000 blow-off that defined the 1990s bubble. The Beige Book’s anecdotes about real companies spending real money on data centers and automation support that view, even if the concentration leaves the economy vulnerable.