Recent GDP data underscores an important shift in the underlying sources of economic growth, with business spending becoming a more meaningful driver of activity. Since the end of 2024, real GDP has advanced 2.5%, but the strongest component by far has been nonresidential (business) investment, up 8.3%. That stands in contrast to declining residential investment and essentially flat government spending. It also represents a striking change in leadership in a consumer-driven economy.
That strength in business investment is especially important because it’s helped offset a consumer backdrop that remains uneven. The University of Michigan’s consumer sentiment index improved in June but remains subdued, with high prices still weighing on household finances and crimping real (inflation-adjusted) spending growth. Consumer contributions to real GDP growth were weak in Q1, although recent retail sales results have been good, even after accounting for the lift provided by higher gasoline prices. Put simply, the economy is being carried forward despite consumer caution not due to robust growth in household spending.
The near-term implications are constructive. Capital investment is supporting output, employment, and income growth despite uneven consumption. The emerging risk is that expectations for technology-related demand outrun realized adoption and profitability, turning today’s investment tailwind into a potential source of overinvestment.
At some point, consumers are likely to need to take the growth baton back from business investment. For now, though, it’s an important catalyst keeping the expansion on track.
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