Capital Group: Why is the U.S. Economy So Resilient?
16 SEPT, 2025
By Jared Franz, U.S. Economist at Capital Group
The U.S. economy is at a crossroads. Cracks are forming and growth is slowing as tariff policies negatively impact hiring and curb consumer spending. On the other hand, generative artificial intelligence is driving a boost in productivity. The question is: can AI fill the gaps in the U.S. economy?
The obstacles from trade restrictions are real, but the benefits offered by artificial intelligence could be even more significant. We expect GDP growth to slow to 1% or less in the second half of 2025, but we do not anticipate a recession. In fact, the AI megatrend could become a structural advantage and accelerate growth in 2026 and 2027.
1. AI Investments Surpass Those of the Dot-Com Era
Tech companies have invested hundreds of billions of dollars in artificial intelligence, despite concerns about future returns on investment. Most of this spending has gone toward building energy-intensive data centers. The boom has benefited some companies in the semiconductor, industrial, and energy sectors. Naturally, all this spending raises a question: are we heading toward a crisis similar to the tech collapse of 2000?
We do not rule out the possibility of an “AI winter”, but the PC and Internet revolution of the 1990s differs from today’s tech landscape. The earlier era was about hardware, connectivity, networks, and information, while AI is about extracting accumulated knowledge. Unlike the dot-com bubble, today’s companies have abundant liquidity and solid earnings. Valuations vary widely, so thorough fundamental research can help distinguish winners from losers. Ultimately, the biggest beneficiaries of the AI investment cycle may not yet have emerged. The current development of AI infrastructure could similarly pave the way for a new generation of companies.
2. Productivity Gains Are Rare — and This is One of Them
Large productivity gains are rare in developed economies. In the U.S., it took years before personal computers and the Internet produced substantial productivity increases. We believe AI may have already ushered in a new era of exceptional productivity. Increasing hourly productivity allows companies to maintain or grow profits even amid rising wages and expenses. A high productivity growth rate has long given the U.S. a structural advantage and contributes to its status as an economic leader. Compared with many developed economies, the U.S. is at the forefront in terms of productivity.
We believe U.S. productivity could nearly double, reaching an annual rate of 4% over the next five years. This increase is positive for GDP and could even help moderate inflation. While we are concerned that AI bottlenecks could limit productivity potential, we are confident that progress can help resolve these issues. The costs of implementing large language models (LLMs) are now 90% lower than they were two years ago.
3. Labor Markets Are Reorganizing for the Future
From sewing machines to automobiles, new technologies have transformed labor markets. The impact of personal computers on the labor market serves as a reminder that technological innovations, after an initial period of job replacement, have created new jobs—often more numerous and better paid. According to a McKinsey & Company report, from 1970 to 2015, PCs eliminated 3.5 million jobs in the U.S., mainly in typing, accounting, and auditing. Over the same period, PCs also created 19.3 million jobs, a net gain of 15.8 million.
The same likely applies to AI, and we are seeing some job displacement in this sector. It is no coincidence that layoffs are concentrated in tech companies heavily investing in AI. Many of these companies are focused on maintaining profit margins and hired excess staff during the pandemic. At the same time, they are competing to hire AI researchers and developers.
Economists are beginning to include AI in economic models and focus on efficiency gains to understand AI’s impact on labor markets. Efficiency gains are greatest for work involving extensive documentation, such as law or programming—standardized tasks often associated with entry-level or high-wage positions that lend themselves to cost reduction. However, it is important to distinguish tasks from jobs. AI ultimately allows workers to focus on higher-value activities and expand their current roles.
Of course, we cannot ignore that tariffs and related uncertainty have caused layoffs and hiring freezes. The coming months may provide more clarity on labor market trends, but for now, we see no evidence of a widespread crisis.
4. Signals Point to a Slowdown, Not a Recession
There are many reasons to worry about the U.S. economy. Inflation has risen, job creation is slowing, and GDP is weakening. We believe these are signs of a mid-cycle economic slowdown rather than a recession. This does not mean there will be no challenges, especially since the full effects of tariffs imposed under President Trump have yet to be felt. Additionally, stock market valuations are high, so any shock could alter the scenario. An economic slowdown generally leaves little margin for error.
Nonetheless, we believe the tailwinds from AI will continue to stimulate investment and fill gaps in the U.S. economy. Finally, the Federal Reserve may soon resume its rate-cutting cycle, which could lower financing costs and help guide the economy through a challenging phase.
