Ballooning AI Investment Sparks Concerns of a Broader Risk to the Nation’s Economy

The escalating push for investment in artificial intelligence (AI) is creating a heightening concern about the extent to which the growth of the nation’s already weakened economy has become dependent upon the AI boom. Job creation has slowed this year, and unemployment is inching up. If stocks and AI spending crash, it raises the odds of a downturn according to the recent article by the Wall Street Journal (WSJ). It has been suggested by a chief global strategist at Canada-based BCA Research that “It’s certainly plausible that the economy would already be in a recession” without the AI boom. WSJ’s article further noted that “business investment in AI might have accounted for as much as half of the growth in gross domestic product [GDP], adjusted to inflation, in the first six months of the year.” Consumer spending has also risen, especially in recent months due to rising AI stocks increasing household wealth, and calculations by JPMorgan Chase indicate that “rising prices of AI stocks alone boosted consumer spending by 0.9%, or $180 billion, over the past year.” An economist at Bank of America reportedly stated that, “it’s the only source of investment right now,” having estimated that “just four companies — Microsoft, Amazon.com, Alphabet and Meta Platforms — will make $344 billion in capital expenditures this year (equivalent to roughly 1.1% of GDP), up from $228 billion last year,” with further projections the capital expenditures by the four companies will total $404 billion next year.

Although there are hopes that in the long run AI “will boost growth by making workers more productive,” the impact has been insignificant so far and the effects on the labor market has been even smaller – “completed data centers employ few people and overall tech employment is down since 2022.” However, a bright spot exists within the construction industry. Due to increasing demand for data centers, the sector that has been “hobbled by high interest rates, a weak real estate market, and the federal crackdown on immigration,” has experienced a boost in activity since “anywhere from 100 to 5,000 people are needed to build a data center,” according reported information from a managing director on the advanced technology group at Turner Construction. Currently “stock/earnings ratios are near record highs” for AI stocks, but if “lofty profit predictions prove wrong, share prices may tumble and investment could slow.” A senior U.S. economist at Barclays reportedly estimates “that a 20% to 30% stock-market decline could reduce GDP growth by 1 to 1.5 percentage points over roughly a year;” and if “AI investment stopped growing, that could knock another 0.5 points off growth.”

Source:    https://www.wsj.com/tech/ai/how-the-u-s-economy-became-hooked-on-ai-spending-4b6bc7ff