AI boom drives GDP while Main Street businesses struggle

AI spending is driving GDP growth and stock market highs, with tech giants like Nvidia and Alphabet reaching record valuations thanks to massive AI infrastructure investments. However, this boom masks widespread economic struggles as small businesses and traditional industries grapple with tariff-driven cost increases and declining consumer spending, creating a stark divide between the AI economy and the broader marketplace.

The big picture: While AI-related capital expenditures contributed 1.1% to GDP growth in the first half of 2025, outpacing consumer spending as an economic driver, the broader economy tells a different story of survival-mode businesses and contracting sectors.

• Eight AI-focused tech companies now represent 37% of the S&P 500’s value, with Nvidia alone accounting for over 7% at a $4.5 trillion market cap.
• U.S. manufacturing has contracted for seven straight months, while construction spending remains flat due to high interest rates and rising material costs from tariffs.
• The S&P 500 and Nasdaq have surged 15% and 20% respectively, while consumer-focused sectors have gained less than 5% year-to-date.

What small businesses are experiencing: Local companies are implementing creative cost-cutting measures to survive rising expenses from Trump’s tariffs and reduced consumer demand.

• Cameron Pappas, owner of Norton’s Florist in Birmingham, Alabama, has reduced bouquet stem counts by three to four stems to maintain pricing: “If a bouquet has 25 stems in it, if you reduce that by three to four stems, then you’re able to keep the price the same.”
• The flower shop sources directly from South American growers to bypass distributor markups, part of Pappas’ “tariff price management” strategy, as 80% of U.S. cut flowers are imported from countries like Colombia and Ecuador.
• One in four small business owners are stuck in “survival mode” according to a September KeyBank Survey, affecting a segment that accounts for 40% of national GDP.

Consumer sentiment breakdown: Holiday spending projections reveal deep pessimism about economic conditions ahead.

• 57% of U.S. consumers expect the economy to weaken in the coming year, up from 30% last year—the most negative outlook since Deloitte began tracking sentiment in 1997.
• Gen Z consumers plan to spend 34% less this holiday season compared to last year, while millennials expect to cut spending by 13%.
• Seasonal retail hiring is poised to fall to its lowest level since the 2009 recession, with new hiring down 58% year-over-year to just under 205,000.

Major corporate adjustments: Even profitable companies are implementing significant cost reductions amid economic uncertainty.

• Target announced its first major layoffs in a decade, cutting 1,800 corporate jobs, with shares down 30% this year.
• Starbucks revealed a $1 billion restructuring plan involving store closures and laying off 2,000 employees across two rounds.
• Microsoft cut around 9,000 jobs in July, while Salesforce cited AI capabilities as enabling workforce reductions.

AI investment momentum: Massive infrastructure deals continue driving market enthusiasm despite broader economic headwinds.

• Nvidia announced a $100 billion investment in OpenAI, helping deploy at least 10 gigawatts of Nvidia systems—equivalent to powering 8 million U.S. households annually.
• Broadcom shares have jumped over 50% this year after doubling in each of the previous two years, while Advanced Micro Devices doubled following its OpenAI partnership announcement.

What experts are saying: Economists acknowledge the AI-GDP connection while warning about implementation challenges and potential market risks.

• “I think the message that the AI economy is sort of driving up the GDP numbers is a correct one,” said Arun Sundararajan, a professor at New York University’s Stern School of Business. “There may be weakness in the rest of the economy, or not weakness, but there may be more modest growth.”
• Northwestern’s Hatim Rahman, an associate professor specializing in AI, cautioned that “AI is not a plug-and-play solution. For many organizations, it’s going to involve engagement with people, processes, culture, tools to be able to reap the benefits.”
• Trump’s tariffs will cost global businesses more than $1.2 trillion this year, with most costs passed to consumers, according to S&P Global, a financial information services company.

Why this matters: The stark disconnect between AI-fueled market gains and Main Street struggles raises questions about economic sustainability and whether current AI investments can offset broader consumer weakness. As investors await earnings from Meta, Microsoft, Alphabet, Apple, and Amazon this week, the challenge will be determining whether AI infrastructure spending can continue supporting economic growth while traditional sectors face mounting pressures.