A combination of surging artificial intelligence investment and robust spending from high-income households has prompted economists to upgrade their outlook for the US economy. The latest monthly Bloomberg survey reveals a consensus bump in third-quarter GDP growth projections, while cooling inflation has simultaneously reduced market expectations for any near-term interest rate hike.

According to the survey, forecasters now see the US economy expanding at a 2.5% annualized pace in the third quarter, up from the 2% estimate made previously. James Knightley, Chief International Economist at ING, noted that technology and AI-related investment are the primary engines behind stronger business capital expenditure, while consumption from higher-earning households is contributing the majority of momentum on the demand side.

Improving inflation data is also reshaping the rate outlook. Economists now broadly expect the Federal Reserve to hold rates steady through July of next year, with market pricing for a September hike falling below 50% amid perceptions that incoming Fed Chair Warsh has a limited appetite for tightening. At the same time, the escalating conflict in Iran represents a major downside risk, as a further spike in oil and consumer prices would put policymakers in a difficult position.

AI Capex Wave Lifts Business Investment

Artificial intelligence has become the core engine of the current US business capital expenditure expansion. Industry analysts at Bloomberg estimate that global AI-related capital spending could surpass the $1 trillion mark this year, with a trajectory that may see it climb to $1.5 trillion by 2027.

Knightley identifies tech and AI-related investment as the "main factor" behind the upward revision in corporate spending. This trend is now reflected in macroeconomic forecasts, with economists incorporating the stronger private investment outlook as a key supporting variable alongside their GDP growth upgrade.

However, the positive impact of AI investment is not uniformly distributed across all forecast periods. The Bloomberg survey shows only marginal changes to GDP growth estimates for quarters through the end of 2027, with projections holding within a narrow 2% to 2.2% range, suggesting that economists remain relatively cautious about the medium-term growth trajectory.

High-Income Spending Anchors Consumer Sector

Support on the consumption side also displays a clear structural pattern. Knightley points out that spending by high-income households is the dominant source of current consumption growth, which implies that the overall consumer recovery lacks a balanced foundation, with lower-income groups contributing relatively less to the uptick.

Meanwhile, the labor market continues its gradual cooling trend. The latest survey shows economists have trimmed their forecast for average monthly nonfarm payroll gains to 66,000 this year, with similar monthly job growth anticipated through 2027. This moderation in employment growth lends further credence to the structural view that consumption momentum is increasingly concentrated among higher earners.

Cooling Inflation Diminishes Hike Expectations

Inflation trends form another critical thread in this round of forecast adjustments. Survey respondents expect the core PCE price index, which excludes food and energy, to average 3.2% this year, gradually easing to an annual average of 2.5% by 2027. While core inflation remains above the Fed's 2% policy target, a downward trajectory is now clearly established.

Against this backdrop, economists widely anticipate the Federal Reserve will remain on hold, extending expectations for unchanged rates through July next year. Knightley adds that with both employment and inflation data cooling, combined with conservative market assumptions regarding new Chair Warsh's willingness to raise rates, the probability of a September hike priced by markets has slipped below the 50% threshold.

Iran Conflict Poses Key External Risk

Despite the relatively optimistic baseline forecast, an escalation of the conflict in Iran is explicitly identified as the primary downside risk to the US economic outlook. Should the confrontation expand further, it could push oil and consumer prices higher, placing additional drag on economic growth.

With inflation yet to return to its policy target, a prolonged external supply shock would compress the Federal Reserve's policy flexibility—making it difficult to tolerate an inflation rebound while also facing constraints from weaker growth. While the economist survey maintains a cautiously optimistic view on the base case, the evolution of this geopolitical variable warrants close attention.

The Bloomberg survey was conducted between August 14 and 19, gathering responses from as many as 85 economists.