America's hated economic boom

• The boom: AI is helping fuel an economy running surprisingly hot, with few signs of labor market weakness.
• The squeeze: Americans are paying more for gasoline, alongside borrowing costs at multidecade highs.

Driving the news: The economy grew at a 2.2% annualized rate in the second quarter, a sharp upgrade from the 1.5% previously reported. Underlying growth was even more striking.

• Real final sales to private domestic purchasers — a measure of consumer spending and private fixed investment that strips out volatile categories like trade and inventories — rose at a 4.6% annualized rate in the second quarter, revised up from 4.2%.
• That is up sharply from 1.8% growth in the January-March period and matches the strongest underlying growth since 2021.

Friction point: The economy is booming in ways that don't necessarily make households feel richer, with the AI investment surge accounting for an unusually large share of growth.

• Consumer spending grew at a 3.8% annualized rate in the second quarter, but business investment grew twice as fast at 7.7%, with data center construction helping drive the surge.
• The AI boom helping power the economy is also adding to inflation pressures and fueling anxiety about what the technology means for jobs.

Zoom in: For households, the on-paper economic boom is not translating into stronger purchasing power.

• Disposable income, adjusted for inflation, stalled in August — down from a 0.3% gain in July. (A separate measure of real wage growth has declined for five straight months.)

Yes, but: Consumers kept spending anyway, according to monthly data released Wednesday morning.

• Real personal consumption expenditures jumped 0.6% in August, far outpacing income growth and pushing the personal saving rate down to 4.1% from 4.6% in July.
• Americans are saving a smaller share of their income than they were this time last year. The saving rate has fallen from 5.2% in August 2025 to 4.1%, near the lower end of its post-pandemic range.
• "Households pinched by higher prices have been either reducing their monthly savings rate or relying more on credit," Nationwide chief economist Kathy Bostjancic wrote in a note.

The big picture: There is new evidence the labor market is holding up, adding to evidence of an economy that's stronger than the sour consumer mood alone might suggest.

• Private employers added 90,000 jobs in September — more than double August's revised 36,000 gain, according to payroll processor ADP.
• But hiring remains concentrated in a handful of sectors, including health care.
• "The big picture number is great. Under the hood, I'd like to see more breadth," ADP chief economist Nela Richardson told reporters Wednesda morning.

The bottom line: The economy enters fall with more momentum than anyone knew, a type of boom that is completely at odds with how consumers feel about it.

What it means for the Fed

For the Federal Reserve, inflation looked somewhat better beneath the surface — even as price pressures remain too high for the Fed's comfort.

By the numbers: Underlying inflation, measured by the Fed's preferred gauge excluding food and energy, ran at a 2% annualized rate over the past three months, in line with the central bank's overall target.

That recent cooling bolsters the case for the Fed to take its time before raising rates again.

• The two-year Treasury yield fell slightly after the data to about 4.85%, with traders dialing back expectations for another near-term Fed hike.
• The odds of a quarter-point hike in October fell to 35% from 51%, according to CME FedWatch.

What they're saying: New York Fed president John Williams hinted as much on Tuesday, saying that the central bank can afford to wait after raising rates earlier this month.

• "With the policy action we took at our September meeting, there is no need for urgency, and we have time to gather more information," Williams said.
• But he left on the table the possibility of another increase later this year if the economy remains strong (Wednesday morning's data suggests that is the case) and inflation stays elevated.

What to watch: Surging AI investment is straining the supply of equipment needed for the buildout, driving up costs and increasingly feeding into broader inflation, he noted.

• "[T]he inflationary impact of the AI-related demand shock is increasingly salient," Williams said. He expects those pressures to ease as supply catches up, though the timing and magnitude are uncertain.