US Economy Runs Hot, Faces Debt Spiral Risk

The U.S. economy is currently demonstrating significant resilience and robust growth, a trend that Federal Reserve policymakers have acknowledged as the central bank continues to implement interest rate hikes to manage inflation. Despite headwinds such as high gas prices and subdued consumer sentiment regarding the cost of living, the economy has successfully absorbed shocks, including those from former President Donald Trump’s tariffs and geopolitical tensions in Iran. This economic strength, however, is juxtaposed with soaring Treasury yields, which have escalated due to the prospect of continued inflationary pressure from a hot economy. These rising yields increase the financial burden of servicing the nation's substantial $40 trillion debt, creating a precarious situation where the economy must consistently outpace borrowing costs to avoid a debt spiral.

Currently, the U.S. Gross Domestic Product (GDP) growth is managing to stay ahead of interest rates. While inflation-adjusted GDP growth has hovered around 2%, nominal growth has significantly exceeded 6%. This figure remains higher than the 10-year Treasury yield, which has climbed to 5.16% even after a substantial increase of over a full percentage point since the onset of the Iran conflict. Further acceleration in economic growth may be indicated by recent data, with a gauge of U.S. business activity in September reaching a five-year high. This suggests that the third quarter could exhibit even stronger performance.

The artificial intelligence (AI) boom is a significant contributing factor to this economic dynamism. Major technology companies, including Alphabet, Amazon, Microsoft, Meta, Oracle, and SpaceX, are projected to collectively invest $870 billion in capital expenditures this year. This represents a substantial increase from the $470 billion invested in 2025. S&P Global estimates that the spending by these hyperscalers alone could surpass $1.3 trillion by 2027. This scale of investment in AI infrastructure is on track to become the largest boom in U.S. history, potentially exceeding the historical significance of the railroad mania, according to economist Stijn van Nieuwerburgh. The infusion of capital from AI development is not confined to the technology sector; it is also stimulating growth in traditional industries. Established companies such as Caterpillar and GE are benefiting considerably from the surge in data center construction, highlighting the broad and extensive impact of AI investment spilling over into various economic sectors.