Richmond Federal Reserve President Thomas Barkin highlighted four "mysteries" characterizing the current U.S. economy, noting its unexpected resilience despite various challenges. Real GDP growth has averaged 2.5% since 2023, exceeding its long-term trend. This resilience is largely attributed to robust consumer spending, which accounts for nearly 70% of GDP. Consumers, adopting a "YOLO" mindset post-pandemic, have continued spending, supported by a low unemployment rate of 4.1% in July 2026, marking the longest streak at or below 4.5% in history. Additionally, rising wealth among homeowners and stock market participants, who disproportionately influence spending, has contributed to this sustained demand.
Another mystery is the strength of business investment, which grew at an annualized rate of 9.5% in the first half of 2026, compared to 5.8% in the decade prior to the pandemic. This investment is significantly fueled by artificial intelligence (AI), with nearly $700 billion in expected AI investments announced in one week earlier this year. Beyond AI, investment momentum is observed across various sectors, including healthy bank pipelines, active mergers and acquisitions, new factory constructions, and a booming defense sector. Businesses are concluding that high uncertainty is the new norm and are unwilling to delay investments, supported by strong corporate earnings, which were up over 30% in the second quarter, and over 50% including hyperscalers.
The third mystery concerns the low unemployment rate, which dropped to 4.1% in July despite a "low-hire, low-fire" environment. While hiring rates are similar to 2013 levels, with only 37% of firms in The CFO Survey hiring for new positions, layoffs are also minimal, with fewer than 6% of firms reporting them. Companies are maintaining headcount or downsizing through attrition, partly exploring AI's potential to achieve objectives without increasing staff. The low unemployment is also a result of slowing labor supply growth, with net migration projected to fall by 2.4 million between 2024 and 2026, and an aging population, as the share of those aged 65 and over has grown to more than 20%.
Finally, Barkin addressed the mystery of stubborn inflation. PCE inflation peaked at 7.2% in June 2022, dropped to the mid-to-low 2s early last year, but has since moved back up due to factors like tariffs, an oil price shock, and extensive AI spending. June headline PCE inflation was 3.7%, with core PCE at 3.3%. The Federal Open Market Committee (FOMC) remains committed to its 2% target, but the path to achieving it remains an open question, with potential implications for future interest rate decisions.
