AI capital spending is offsetting soft consumer spending — for now |
AI capital spending is offsetting soft consumer spending — for now
Getting a clear read on the U.S. economy is challenging of late in large part due to the impact that the buildout of artificial intelligence is having.
Normally, consumer spending is the main driver of economic growth, as it accounts for nearly 70 percent of aggregate demand. In the first quarter of this year, however, its contribution to the economy’s 2 percent growth was surpassed by business fixed investment. The latter surged by 10.4 percent and represented three quarters of overall economic growth, according to the Bureau of Economic Analysis.
This pattern, moreover, is likely to continue for a while longer. Wall Street analysts are upping their projections of AI-related infrastructure spending considerably as new data centers proliferate. Researchers at Morgan Stanley, for example, now project that capital spending for five “hyperscalers” — Amazon, Alphabet, Meta, Microsoft and Oracle — will top $800 billion this year and $1.1 trillion next year. The latter estimate is in line with other Wall Street firms and would exceed current U.S. spending on national defense.
If these projections materialize, former White House AI czar David Saks claims the capital spend could contribute roughly 2.5 percent to GDP growth this year and more than 3 percent next year. John Mowrey, chief investment officer of NFJ Investment Group, contends it is the largest capital expenditure cycle in modern history and that it rivals the buildout of railroads in the 19th century.
Meanwhile, consumer confidence has plummeted to record lows. The University of Michigan’s survey for April posted........