AI Investment Drives GDP Growth While Main Street Struggles with Costs

The artificial intelligence (AI) boom is propelling the U.S. economy and stock market to new heights, but small businesses across the country are grappling with rising costs and a cautious consumer base.

AI Boosts Economy, Stock Market

Companies like Nvidia, Alphabet, and Broadcom are leading the charge, driving the S&P 500 and Nasdaq to record highs. AI-related capital expenditures have contributed 1.1% to GDP growth in the first half of the year, according to a JPMorgan Chase report. This spending has outpaced the U.S. consumer as an engine of economic expansion.

Small Businesses Feel the Pinch

For Cameron Pappas, owner of Norton's Florist in Birmingham, Alabama, the AI boom feels distant. His business, which generated $4 million in revenue last year, is dealing with higher costs from tariffs and a downbeat consumer. 'We've just got an eagle eye on all of our costs,' Pappas, 36, tells CNBC. To avoid raising prices, he has had to get creative, reworking some of his designs. 'If a bouquet has 25 stems in it, if you reduce that by three to four stems, then you're able to keep the price the same,' he explains.

Economic Disconnect

The broader economy paints a different picture. U.S. manufacturing spending has contracted for seven straight months, and construction spending remains flat or down due to high interest rates and rising costs. Cushman & Wakefield reports that total project costs for construction in the fourth quarter will be up 4.6% from a year earlier, largely due to tariffs on building materials.

Stock Market Disparity

Eight tech companies, all tied to AI, are valued at $1 trillion or more, making up about 37% of the S&P 500. Nvidia, with a $4.5 trillion market cap, accounts for over 7% of the benchmark's value. Broadcom shares have surged more than 50% this year, while Nvidia and Alphabet have jumped almost 40%. In contrast, the S&P 500 subgroups that include consumer discretionary and consumer staples companies have increased by less than 5% year to date.

Consumer Market Woes

The latest troubling sign in the consumer market came when Target announced it is cutting 1,800 corporate jobs, its first major round of layoffs in a decade. Target shares have plunged 30% this year. 'I think the message that the AI economy is sort of driving up the GDP numbers is a correct one,' says Arun Sundararajan, a professor at New York University's Stern School of Business. 'There may be weakness in the rest of the economy, or not weakness, but there may be more modest growth.'

References

• AI spending is boosting the economy, but many businesses are in survival mode