Change In Construction Spending Pace Since December 2024*
This week, 10-year Treasury yields reached levels last seen in 2002, even as markets pared expectations for Fed rate hikes. What gives? Well, the economy keeps surprising to the upside. The revised estimate of second-quarter GDP showed the economy grew 2.2%, up from the prior 1.5% reading, driven by stronger consumer spending despite higher energy prices. Meanwhile, AI-led investment remained the primary growth engine, and the momentum appears to be accelerating into the third quarter. The Census Bureau’s August Monthly Construction Spending Report released this week also shows that construction spending on data centers rose 78% year-over-year in August, as demand for AI compute continues to outpace supply. More interestingly, spending on power plants and grid infrastructure has also accelerated in recent months, likely fueled by rising electricity demand from data centers. With the economy on a strong footing, the Fed can focus squarely on elevated inflation. Meanwhile, a higher fed funds rate and strong growth could keep yields higher for longer.
