Near Term Resiliance Continues

Near Term Resilience Continues

Data this week reveals a resilient economy amid increasing adverse headwinds. Second quarter real GDP growth, for example, was revised upward from 1.5% to 2.2%. Consumer spending showed strength growing at 3.8% - and may be accrued to tax refunds. Business investment remained strong- reflecting continued strength in AI/data center spending. A critical source of the upward GDP revision was inventory accumulation. With inventories at an inventory-to-sales ratio at 1.3, this build-up in inventories does not suggest a corrective inventory adjustment is forthcoming.

The GDP growth that has materialized thus far in 2026 is a remarkable testament to the resiliency of the economy given the strength of the headwinds that face the economy. The Iran conflict has boosted oil prices and inflation - amping up the pressures on consumers. Indeed, consumer attitude surveys have reached new lows. Conference Board’s consumer confidence index reached a 12.5 year low. University of Michigan’s consumer sentiment index neared an all-time, 74 year low (lower than those of the pandemic, great recession, and stagflation of the 1970’s and 1980’s).

And yet, given all this, the economy showed remarkable growth. Much of that growth is attributed to robust growth surrounding data center and AI activity. An initial, quick estimate suggests that roughly 37% of the growth that materialized was credited to AI/data center activities. Lacking, this support GDP growth would have recorded nearly a full point lower. Frankly, my gut tells me its contribution to growth was even larger.

The strength wasn’t just AI and data centers. People have jobs. September’s employment report showed a continued expansion in jobs – reflecting 29,000 new jobs and the unemployment rate increased slightly to 4.2%. Since the start of the year, average net job creation has averaged more than 70,000 monthly. While September’s report is off the year’s average, it still reflects stability.

These two factors are the key anchors for the economy’s resilience. These anchors are likely to remain in place for some time. Unfortunately, the headwinds facing the economy are expected to worsen. The Iran conflict is expected to endure. Strategic oil reserves may become depleted and boost oil prices higher. Inflation and interest rates are expected to increase. Mortgage rates could threaten 8%. These adverse forces are expected to build and provide a greater offset to the anchors.

At the same time the headwinds facing the economy are expected to increase, the strength of the anchors to economic growth may weaken. Not-in-my-back-yard (NIMBY) could slow data center construction. Concerns regarding AI’s threat to mankind could slow its growth. Finally, the no fire, no hire job market could gradually weaken as the implementation of AI could nudge firings up and hirings down.

Combining it all together, the near-term outlook is expected to reflect a gradual erosion. For some, the second half of the year will look similar to the first half. Construction activity will continue to edge down. Indeed, the Census’ construction put-in-place data translated into real (inflation adjusted) spending showed a 1.2% decline. Even allowing for a mild slowdown, data center, utility and the existence of large public infrastructure backlogs will cushion the impacts arising from continued weakness from interest sensitive sectors of construction activity.