$6.51 Diesel Should Be Crushing the Economy: Here’s Why It Has Rarely Grown Faster

The national average price of a gallon of diesel has hit a record $6.51, while gasoline remains near historic highs. Yet, the U.S. economy does not seem to care. • State Street SPDR S&P 500 ETF Trust stock is moving in positive territory. Why are SPY shares climbing? The Federal Reserve Bank of Atlanta’s GDPNow model estimates third-quarter real gross domestic product growth at 5.1% on a seasonally adjusted annual rate, as of Sept. 21. Those two numbers reveal the strangest feature of the U.S. economy. A 5.1% growth would be the strongest rate since the fourth quarter of 2021. Excluding the post-COVID-19 pandemic rebound, it would be the strongest since the second quarter of 2014. Since 2000, the economy has grown faster than 5.1% in only eight of 106 quarters. See More: Top Momentum Stocks The Fuel That Moves Goods Has Never Cost More Diesel sits inside almost everything Americans buy. It powers trucks, farms, construction equipment and parts of the manufacturing supply chain. At the start of the war against Iran in late February, the national average was about $3.76 a gallon. Diesel is now 73% above that level. Regular gasoline, at $4.48 a gallon, is up about 41% from a year ago, according to AAA. That should operate like a tax on companies and households. Freight becomes more expensive, margins narrow and consumers have less money left for other purchases. Yet August retail sales jumped 1.2% from July and 6% from a year earlier. Even after stripping out cars, gasoline, building materials and restaurants, core sales recorded a 1.4% monthly gain. That would be the strongest since September 2024. The data says U.S. consumers remain strong despite sky-high fuel prices. “The nominal economy is booming,” Bank of America economist Aditya Bhave said in a recent note. Bank of America raised its third-quarter personal consumption growth estimate to 3.4% from 2.6%. GDPNow is even stronger, tracking real consumer spending at 4.1%. Read Also: ExxonMobil Stock Falls Monday: What's Happening? AI Investment Is Acting Like Private-Sector Stimulus Consumption is only half the story. The second engine is corporate investment in data centers, chips and software. Microsoft Corp. (NASDAQ:MSFT), Amazon.com Inc. (NASDAQ:AMZN), Alphabet Inc. (NASDAQ:GOOGL) and Meta Platforms Inc. (NASDAQ:META) plan to spend about $725 billion combined on capital expenditures in 2026, up 77% from $410 billion last year. That money flows into data centers, chips, electrical equipment, cooling systems and power generation. It creates income far beyond the technology sector. On Sept. 10, GDPNow was tracking third-quarter real private investment growth at 19.1% annualized. AI is not the entire category, but it is a major force behind the expansion. On Monday, Chicago Fed President Austan Goolsbee said AI investment could be "spilling out of its own lane and raising aggregate output beyond what the economy can absorb." Notably, this spending is largely insensitive to fuel costs. The Fed Has Started Hiking Into The Boom Strong growth and energy-driven inflation have pushed the Fed to act. On Sept. 16, the Federal Open Market Committee voted 12-0 to raise its benchmark rate by a quarter point, to a range of 3.75% to 4%. It was the first increase since July 2023. Sixteen of the 18 participants who submitted projections expect another hike this year. Bhave said strong nominal growth gives Fed Chair Kevin Warsh little reason to stop. Bank of America’s base case is a total of 75 basis points in hikes. Bhave flagged two risks: wages could re-accelerate if unemployment keeps falling, and the Iran conflict could leave more inflation in the pipeline than expected. In that case, the Fed would face a choice between tolerating above-target inflation for longer or slowing demand more sharply, at the risk of a recession. What It Means For Investors A strong economy and booming earnings have supported risk assets, despite high inflation and rising interest rates. The SPDR S&P 500 ETF Trust (NYSE:SPY) is up about 12.8% year to date, while the Invesco QQQ Trust Series 1 (NASDAQ:QQQ) has gained roughly 19.6%. Both are on track for their fourth straight year of gains. Chipmakers have led the rally. The iShares Semiconductor ETF (NASDAQ:SOXX) has surged about 83% since the start of the year, the clearest market expression of the AI investment boom. Long-duration bonds have faced the opposite setup. The iShares 20+ Year Treasury Bond ETF (NASDAQ:TLT) is down about 6.3% year to date. On Sept. 15, it closed at $80.71, below its October 2023 low. Bond prices fall when yields rise, and investors are demanding more to lend long-term to a government facing hotter growth, sticky energy inflation and a hiking Fed. What the data shows so far is an economy absorbing a record fuel shock without slowing, and a central bank that now sees that strength as a reason to keep tightening. Read Also: Fed’s Goolsbee Sounds the Alarm on Inflation: October Hike Odds Stay Above 50%