Dear Reader,
What a great day it is to be alive.
For the past couple of days we’ve talked about how the AI trade is changing.
That’s the negative side of the picture.
Today I want to give you the positive side, and why the economy looks so strong.
The Headline Number
The Commerce Department reported that third quarter GDP grew 3.4%.
That’s the fastest pace in a year.
It’s astonishing when you consider what the economy has been chugging through.
Tariff drama. Oil problems with Iran. Trade drama.
It just keeps moving.
No other major economy is coming close.
Look Under the Hood
The deeper numbers are even more impressive.
Professional investors, economists, and Fed watchers like to look at a number called final sales to private domestic purchasers.
It strips out the volatile and cyclical pieces, so you see core private sector demand without the drama.
That number grew at 4.9%.
That’s the fastest since the bounce back from the 2021 pandemic.
Consumer spending grew 3.8%, the largest contributor to GDP growth.
Remember, consumer spending is roughly 70% of economic activity.
Then there’s the number that really got my attention.
Business spending grew 12.7%.
I went looking for precedents.
The last time it was that big, setting the pandemic aside, was 2012, coming out of the real estate crash.
Businesses are ramping up their spending as the AI boom accelerates outward.
AI-related spending was the standout.
Computer equipment spending grew 67%.
Data center construction rose at a 127% rate.
What About Housing?
A lot of people think the AI trade has crowded out housing construction.
I don’t see it that way at all.
People aren’t buying houses because they’re still overpriced relative to incomes.
And construction hasn’t ramped up because the policies aren’t there.
Some states have friendly policies, and you see a lot more housing activity there.
But many of the most populated states, especially on the coasts, don’t.
That’s a different root issue.
I wish it would be addressed, but that’s another story.
The Disconnect
Here’s the irony.
Despite how fast the economy is growing, 62% of people polled say it’s not doing so well.
Only 37% rate it good or excellent.
I’d bet that if you broke that down, the 37% are people who own stocks or run businesses.
And the 62% are people who work for a paycheck, often by the hour, and feel inflation biting into their day-to-day lives.
There’s a lag between the start of a boom and when good-paying jobs and rising wages show up.
This is the start of a boom, and that takes time.
You’ve seen the political ramifications.
When 62% of your population doesn’t feel good about the economy, we all saw what happened yesterday.
What did Carville say back in the ’90s?
“It’s the economy, stupid.”
It always is.
These are kitchen table issues.
When I was growing up it was guns and butter.
Those are the things that decide elections.
Human nature hasn’t changed.
The Big Picture for Investors
While a lot of the big tech stocks are in correction, the economy looks strong.
My gut tells me there’s going to be a slowdown in the AI build-out.
I’m actually happy about that, because it probably stretches the expansion and the bull market further.
If you pour that much money in that fast, a big chunk of it gets wasted on bad investments.
If you stretch it out over time and get more selective about what you back, it’s more sustainable.
It gives the whole thing longer legs.
That’s smarter for us as a country, especially with such a large percentage of GDP going into it.
It’s a very big bet.
The last thing I want to see is a multi-trillion dollar bet wasted on nothing, like all that crypto nonsense.
Investors need to stop putting their money into foolish AI startups without real revenue, and follow the “smart money” by investing in companies like this one instead.
Have a wonderful day.
I’ll see you tomorrow.
“The Buck Stops Here,”
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Written by Dylan Jovine