If you had told me a year ago that the United States would be waging an intractable war in the Middle East, oil prices would rise to more than $100 a barrel, interest rates would be moving sharply higher, and inflation would be running well above 3%, my forecast for the U.S. economy would have been gloomy to say the least.
In a recent piece from Capital Group, economist Jared Franz makes a compelling case that the U.S. economy is on far stronger footing than the consensus suggests. From a labor market that continues to defy expectations to healthy consumer balance sheets and an unprecedented wave of AI-driven corporate investment, Franz sees GDP growth running at 2.5–3% this year and next. I thought this was a worthwhile read and wanted to share it with you.
What explains the remarkable resilience of the U.S. economy? There are many reasons but, in my view, these are the three primary drivers:
1. The U.S. labor market is defying expectations: The latest U.S. jobs report, released September 4, was nothing short of a blockbuster. The U.S. economy added 162,000 jobs in August, three times higher than consensus estimates, with the largest gains coming in leisure and hospitality, government, education and healthcare. The jobs report was so unexpectedly strong that it helped change expectations for U.S. monetary policy. Accelerating job growth and higher inflation were two of the key factors that convinced the U.S. Federal Reserve to raise interest rates on September 16 — the first hike in more than three years.
2. Consumer balance sheets are healthy despite higher inflation: U.S. consumer balance sheets are holding up well in the face of mounting inflationary pressures. Wage growth has remained steady at an annualized rate of 3.7% to 4.1% as of August 2026, generally outpacing inflation. So, even with higher-than-usual inflation, American consumers have managed to stay in relatively good shape, and their spending activity shows it. We’ve seen weakness among low-income households hard hit by rising energy prices, but middle- and high-income groups appear to have adjusted to the shock and made up the difference.
3. The AI-related spending surge is unprecedented: The sheer scale of AI-related spending is like nothing we’ve seen before. Most of the capital expenditures — an estimated $800 billion this year — are going toward the construction of massive AI data centers and related projects across the United States. Despite a mounting political backlash, there appears to be no slowdown. On the contrary, AI-related spending estimates have been revised upward on numerous occasions. I expect upward revisions in 2027 and 2028, as well.
There are certainly risks to this optimistic outlook, including further escalation of the Iran war, additional increases in oil prices, sharply higher interest rates, and the possibility that AI will not produce the return on invested capital companies expect. Any of these could reverse the favorable investment environment of the past few years.
That said, the economy and the markets are not the same thing. Today’s high levels of market concentration have embedded risks, which is why it’s important to consider a broadly diversified investment approach that goes beyond top-heavy indexes.
Click here to read the full article from Capital Group.
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