US economic signals are showing a series of seemingly contradictory trends. Inflation remains stubbornly above the Federal Reserve's target, real incomes have declined, and consumer confidence has hit historic lows. Yet, economic growth and consumer spending continue to show resilience. While corporate hiring has become cautious, investment in artificial intelligence (AI) is surging at a rapid pace.
Richmond Fed President Thomas Barkin, in a speech to the Greenville Chamber of Commerce, described the current US economy as an environment filled with "puzzles." He focused on discussing consumer resilience, corporate investment, the labor market, and persistent inflation. Barkin is currently an alternate voting member of the Federal Open Market Committee (FOMC).
Real Incomes Fall, Confidence Low, Yet Consumers Keep Spending
Barkin noted that US inflation remains above the Fed's target, real incomes have fallen over the past year, and consumer sentiment has clearly deteriorated. Since the start of 2026, the University of Michigan's consumer sentiment survey has recorded three of its lowest monthly readings in over 70 years. However, in stark contrast to this pessimism, US economic activity has not slowed significantly. Since 2023, US real GDP has grown at an average rate of about 2.5%, exceeding estimates of the economy's long-term trend growth rate. This year, even with high gasoline prices further squeezing household budgets, the US economy has shown strong resilience, with healthy demand and even a slight decline in the unemployment rate.
Barkin believes one key reason is that consumers have never stopped spending. He suggested that, in the aftermath of the pandemic, US consumers seem to have embraced a 'you only live once' (YOLO) spending mentality, willing to spend money even in the face of economic uncertainty. At the same time, wealthier households have accumulated more wealth in recent years, further supporting overall consumption capacity.
AI Investment Scale 'Unimaginable', Corporate Demand Nearly Unaffected by High Rates
Corporate investment has also shown unexpected resilience, and Barkin attributes the most obvious driver to artificial intelligence. "The scale of investment is unimaginable," Barkin said. More notably, this wave of AI investment does not appear to be significantly restrained by high interest rates, rising construction costs, or economic uncertainty. "Demand seems to show little sign of stopping," he added. Strong corporate earnings are providing the foundation for these massive capital expenditures. Barkin noted that US corporate earnings grew by more than 30% year-over-year in the second quarter. When including hyperscale cloud computing companies, earnings growth exceeded 50%. Meanwhile, market forecasts for the next quarter's corporate earnings are still being revised upward, and corporate leverage ratios are lower than in 2020. In his view, strong earnings mean companies have both the reason and the financial capacity to continue investing in AI infrastructure, so AI-related capital expenditure remains resilient even with higher financing costs.
Corporate Investment Booms, but Hiring is Cautious; AI Has Not Yet Triggered Mass Layoffs
However, strong capital spending has not translated into a hiring boom. Barkin said that, in contrast to corporate investment, companies, amid a highly uncertain environment, remain worried about over-hiring and are therefore in a "hiring pause" state. Many companies are choosing to keep their headcount stable or gradually reduce staff through natural attrition. The market is highly focused on whether AI will cause massive job losses, but Barkin believes that, based on current applications, most AI use cases have not yet shown a clear path to significantly reducing staffing needs. The most notable exceptions so far are in roles like computer programmers and customer service representatives. Meanwhile, another unusual phenomenon has emerged in the US labor market: a slowdown in the growth of labor demand has coincided with a decline in the growth of labor supply. Barkin pointed out that as net immigration to the US has fallen sharply and the population continues to age, fewer people are entering the labor market looking for work. Therefore, "while there may be fewer new jobs being created, there are also fewer people looking for those jobs." This partly explains why, despite a clear cooling in corporate hiring, the US unemployment rate has remained relatively low.
Inflation Remains the Biggest Puzzle: Will the Fed Need to Hike Further?
Barkin believes that persistent inflation is another unsolved puzzle for the US economy. However, he suggested the real question is not whether inflation will eventually return to the Fed's 2% target, but how it will get there. The core issue before the Fed is whether inflation is on a path to sustainably decline to 2% on its own, or whether the central bank will ultimately need to raise interest rates further to complete the final stage of the anti-inflation process. Barkin warned that US inflation has been "too high for too long," and the longer it persists, the more likely it is that the price expectations of businesses and consumers will adjust upward. Once higher inflation expectations become entrenched, relying on existing economic forces alone may not be sufficient to bring inflation fully back to the target. He said that if this risk is becoming a reality, bringing inflation back to 2% may require additional policy help. Barkin's comments highlight the policy dilemma currently facing the Fed: US consumption and AI investment continue to support economic growth, the labor market is cooling but not deteriorating significantly, and inflation remains above target. In this data-conflicting environment, whether the Fed needs to tighten monetary policy further or wait for existing inflationary pressures to subside on their own remains the core of future policy discussions.
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