Capital Markets Update #27

It’s hard not to marvel at the strength of the US economy. Data released from both private and public sources over the past week week continues to underscore the US economy’s durability and momentum.  Headline GDP was up 1.5% on a QoQ basis, annualized.  That’s a bit of a false negative as consumer spending (2.1% growth) and business fixed investment (1.2% growth) were significantly higher than both trailing one and ten-year averages.  YoY wages and salaries were up about 4.9% while real disposable income was up 0.5% YoY, or 3.5% on a MoM basis annualized. Core PCE prices were up 0.13% MoM in June and about 2.9% on a trailing 3-month annualized basis. The Dallas Fed trimmed mean inflation reading, which strips out the highest and lowest readings in the index, now sits at 2.2% YoY inflation and has been in secular decline since 2024.  Jobless claims are low across the board.  The JOLTS report reiterated the strength of the labor market, with 7.4MM jobs currently seeking workers, while the 3-month moving average of job openings continuing to trend higher as it has consistently throughout 2026. 

Whew, got all that?  We cite these figures as its important to remind ourselves that its these exact economic underpinnings which afford companies the opportunity to spend on such expeditionary measures as the dramatic AI buildout and adoption effort.  You really can’t have one without the other.  If the consumer were weak or insecure about its future, overall spending would be lower, which, in turn, would put pressure on enterprise profits and drain market confidence.  Its sales of products like the Microsoft 365 suite or Dell computers or cars with tons of chips in them or cell phones or purchases from Instagram adds, amongst all of the other stuff which rolls up to the everyday hyperscaler P&L which gives Google, Meta, Microsoft and their cohort the confidence to lean hard on free cash flow in support the next phase of their business plan.

We found a great data source published by the BEA which outlines key input data to its overall advanced GDP calculation.  Its actually quite fascinating to better understand the extent to which the BEA reaches into a myriad of data sources in its righteous effort to produce a high-quality summary of the US economy.  On an annualized basis, the US economy produces something like $32.5T in GDP, of which $27.3T or 84% is accounted for by consumer spending and private fixed investment.  Now think about that.  About 84% of our total GDP is endogenously created by the private sector and relies primarily on the US consumer.  That’s an exceptionally powerful position to be in as a nation.  For reference, according to Worldbank, 40% of German GDP is exports – which means they’re reliant on other markets buying their goods and accepting their prices.  A tenuous proposition, clearly, in today’s world where China is coming for the bread of every goods-producing nation globally.  Domestic non-residential investment in the United States was up about 9.9% YoY on a nominal basis, which was primarily driven by “Other Equipment – Non Aircraft” (likely construction equipment and other data center inputs), and Intellectual Property Products (software).  The big drag in overall GDP growth was clearly our trade deficit, which was estimated at -$870B in Q2 2026.  According to the Census, which ironically tracks trade by end use category, $494B of YTD imports (or $988B Annualized) can be directly tied to the AI buildout in sectors such as computers, generators, semiconductors, electrical apparatus, computer accessories and telecom equipment (fiber).  Frankly, it’s unlikely this deficit will be remediated until TSMC and Micron factories ramp up in Arizona and New York.  But, once these mega-fabs are operational, it’s intriguing to prospect what our headline growth figures could be. 

The final stat deserving of your consideration is the ISM PMI Manufacturing reading.  The US got its best Manufacturing reading last month since November 2021 at 55.6 – well above ISM’s internal barometer for “expansion,” set at 47.5.  The US manufacturing activity index has consistently expanded (i.e. existed at a level in excess of 47.5) since October 2024 and has ejected out of orbit in 2026 with consistent readings in excess of 52.  For reference, 2025 readings were range-bound between 47.5 and 50 throughout the year.  If you were to index this month’s manufacturing report card, orders were up, production was up big, employment was up, supplier deliveries were up, order backlog was up big, and new export orders were up big, amongst other supportive readings.  The only components to the index in contraction were inventories and prices.  I don’t know how one could construct a better manufacturing snapshot. 

In summary, we believe it’s important to remind our readers as to what the data shows is the boots-on-the-ground reality of the US economic outlook.  We’ve been accused of being consistently pollyannish and some sort of a perma-bull.  As a reminder, if our readers need reminding, we try and be as objective as possible given the data we track.  And to the perma-bull accusations, we say pull up a one, five or ten-year chart of US GDP output, median consumer net worth, and the S&P 500.  Tell us what you see.