There are two economies: AI and everything else

Since President Trump took office, the economy has followed a pattern.

- Natasha Sarin

The administration does something outlandish - tariff rates at levels not seen in a century, trying to fire a Federal Reserve governor and economists, myself included, warn of the deep risks.

So far, though, the economy has kept chugging along. The market did plummet in April over the "Liberation Day" tariffs, but it has since rebounded many times over, rising to new highs 30 times this year. Risky policies that alarm mainstream economists don't appear to be having much of an effect on the economic indicators we follow.

That's because something positive is happening in Trump's economy. It's just happening in spite of his policies, not because of them.

The economy is being bolstered by a remarkable investment boom in artificial intelligence. A credible estimate suggests that AI capital expenditures may reach 2 per cent of the gross domestic product in 2025, up from most likely less than 0.1 per cent in 2022. To provide some sense of scale, that means the equivalent of about $1,800 per person in America will be invested this year on AI.

Without these investments, economic growth this year may have clocked in at around 1 per cent. Instead, it is likely to land at almost twice that. Just seven large technology companies are responsible for nearly 60 per cent of the gains in the S&P 500 this year.

The coat of AI gloss is giving the administration runway to double down on bad ideas: America's effective overall tariff rate is nearly back to the levels announced in April, the vice president has called for the administration to be involved in the Federal Reserve's interest rate decisions and Trump fired the head of the Bureau of Labor Statistics after a disappointing jobs report.

The situation is worse than having all of your economic eggs in one basket. It's closer to putting all of your eggs in one basket and stomping on all the other baskets.