Assessing the U.S. Economic Boom: Structural Drivers vs. Cyclical Fragility

The recent acceleration in U.S. economic growth is being powered by a specific set of forces, but their durability is now in question. The latest data shows the economy expanding at a solid 4.3% annual rate in the third quarter of 2025, a slight uptick from the prior quarter. This momentum is being driven by two key pillars: robust consumer spending and government investment. However, this strength is being partly offset by a decline in business investment, a critical signal of underlying business confidence.

At the heart of this dynamic is the surge in investment in artificial intelligence. Deloitte's baseline forecast explicitly models AI investment as a central driver of near-term growth, with business investment expected to remain strong. Yet the analysis also highlights a major vulnerability. In its downside scenario, the firm models a sudden pullback in AI investment, which would have a direct and significant impact on consumer spending. The forecast shows that under such a scenario, real consumer spending slows to 1.6% in 2026, down sharply from an anticipated 2.6% earlier in the year. This illustrates how the current consumer spending boom is not just a function of wages, but is being propped up by a wealth effect from equity gains fueled by AI optimism. If that investment momentum stalls, the foundation for consumer demand weakens.

Adding to this uncertainty are new tariff policies, which Deloitte identifies as a key variable that could alter the economic trajectory. The firm assumes that average effective tariff rates will rise further to 15% by the first quarter of 2026, up from about 2.5% at the start of the year. This shift is not a minor adjustment; it represents a fundamental change in the cost structure for imports. The policy introduces a persistent headwind, as tariff costs are expected to raise the core personal consumption expenditure price index by 3% in 2026. This directly pressures consumer purchasing power and complicates the Federal Reserve's inflation outlook, keeping core inflation above target for years.

The bottom line is that the current growth engine is a complex mix of powerful but potentially fragile inputs. AI investment is providing a near-term boost, but its sustainability is a major risk. At the same time, new trade policies are adding a structural cost that could erode demand. The economy's path forward hinges on whether AI spending can continue to outpace these new trade headwinds, or if the combination of a potential investment slowdown and higher import costs will force a recalibration of growth expectations.

Labor Market and Real Wage Dynamics

The recent economic expansion is delivering a mixed message for American workers. On one hand, there is clear evidence of improved purchasing power. On the other, the underlying job market remains structurally weak, raising questions about the breadth and durability of this prosperity.

The data on real wages is positive. In November, real average hourly earnings for all employees increased 0.8 percent from the year before. This gain stems from nominal wage growth of 3.5% outpacing inflation of 2.7%. More broadly, the period from July 2024 to July 2025 saw a notable transmission of strength, with nominal wages growing 1.5 percentage points faster than inflation. For a worker, this means a tangible increase in real income, a rare occurrence in recent years and a direct benefit of the current economic momentum.

Yet this gain is occurring against a backdrop of a labor market that is not expanding. Total job gains for 2025 are on track to be a meager 710,000, the weakest hiring outside of a recession since 2003. This stark contrast reveals a K-shaped economy in action. The limited job growth is heavily concentrated in specific sectors like health care and leisure and hospitality, while the broader economy is experiencing muted hiring. The result is a situation where existing workers are seeing their paychecks stretch further, but the opportunity to join that group is shrinking.

The bottom line is that the current growth is not translating into broad-based prosperity. It is a story of winners within a constrained market. The real wage gains are a welcome sign of improved worker bargaining power in the short term, but they are not being matched by the creation of new, accessible jobs. This imbalance creates a fragile foundation. If business investment slows-as modeled in the downside AI scenario-or if tariff-driven inflation pressures return, the pressure on real wages could reverse quickly, while the weak job market would offer little buffer. For now, the wage data shows the boom is reaching workers, but the labor market shows it is not reaching enough of them.

Inflation, Productivity, and the Policy Tightrope

The sustainability of the current boom now hinges on a delicate balance between cooling inflation and tepid growth, a dynamic that leaves the Federal Reserve on a policy tightrope. On the surface, the disinflation story is holding. The annual inflation rate remained steady at 2.7% in December, with the core rate at a multi-year low of 2.6%. This moderation, driven by easing energy and used car prices, suggests the broad-based price pressures of the past few years are receding. Yet, the persistence of elevated shelter costs and accelerating food inflation shows the path to the Fed's 2% target is not linear. Inflation is cooling, but it is not vanishing.

This sets up a classic dilemma for policymakers. The growth outlook, while revised slightly upward, remains subdued. The Philadelphia Fed survey projects GDP growth of 1.9% for 2025 and 1.8% for 2026. That is a modest improvement from forecasts three months ago, but it still falls well below the 4.3% annual pace seen in the third quarter of 2025. The economy is decelerating from its recent peak. This creates a tension: the Fed needs to see more durable inflation declines before cutting rates, but aggressive tightening to chase that target risks snuffing out the fragile growth momentum that remains.

Fed officials are navigating this uncertainty with cautious optimism. Minneapolis Fed President Neel Kashkari recently expressed confidence that inflation is heading down, while also acknowledging the endpoint is unclear. His outlook for growth is positive, but his policy stance is not. He stated that the Fed's interest rate policy remains uncertain, with no clear signal on timing for the quarter-point cut penciled in for this year. The central bank is waiting for more data, a posture that reflects deep concern about inflation persisting above target while also being mindful of the tender job market.

The bottom line is that the policy environment is now a key variable in the economic setup. The Fed's cautious wait-and-see approach is understandable given the mixed signals, but it also prolongs the period of uncertainty for markets and businesses. With growth projected to slow further and inflation still above target, the central bank is effectively choosing to let the economy cool gradually. This could support the disinflation trend but may also amplify the fragility of the boom, especially if the combination of a slowing AI investment cycle and new trade costs begins to bite harder. The policy stance, for now, is a brake on the accelerator.

Catalysts and Scenarios: The Path Forward

The trajectory of the U.S. economic boom now turns on a handful of forward-looking factors. The data from the past year paints a picture of strong growth in pockets, but persistent weakness in the labor market and consumer sentiment. The coming months will test whether these are temporary cyclical dips or signs of a deeper structural shift.

The most immediate catalyst is the upcoming December jobs report. Economists are forecasting a modest 55,000 jobs to have been added, a figure that would underscore the year's overall hiring weakness. This low consensus highlights the fragility of the labor market, where gains remain heavily concentrated in health care and leisure. The broader economy's muted hiring, coupled with a record-low perceived probability of finding a job, creates a feedback loop. When workers feel hopeless about employment prospects, they are less likely to spend, which in turn dampens business confidence and hiring. The report will be a critical signal of whether this lopsided recovery is beginning to broaden or is simply stalling.

Consumer sentiment provides another key barometer. It remains nearly 25% below last January's level, a stark measure of economic anxiety. While sentiment ticked up slightly in January, it is still anchored by worries over high prices and a soft labor market. This guarded outlook is a direct headwind to the consumer spending that has powered recent growth. If sentiment does not improve meaningfully, it could slow the wealth effect from equity gains and undermine the AI-driven consumption boom.

Finally, the Federal Reserve's communication will be a decisive factor. The central bank's policy stance remains uncertain, with no clear signal on the timing of a quarter-point cut. Yet, Fed officials like Minneapolis President Neel Kashkari are explicitly weighing the dual mandate, noting that too aggressive a rate hike could hurt the labor market. A shift in communication-either a more dovish signal that supports growth or a hawkish pivot that prioritizes inflation-will directly impact the cost of capital. This, in turn, will influence business investment in AI and other areas, effectively determining whether the boom's drivers can outlast the new trade headwinds.

The primary scenario now is one of fragility. If the December jobs report shows a modest gain, consumer sentiment remains depressed, and the Fed maintains its wait-and-see stance, the economy risks a gradual deceleration. The AI investment cycle could peak, tariffs continue to pressure inflation, and the weak labor market offers no buffer. The alternative, a more dovish Fed and a broadening labor market, could sustain the boom. But for now, the setup is one of cautious optimism, where each incoming data point is a potential catalyst for a recalibration.