{"id":49076,"date":"2025-08-06T08:41:11","date_gmt":"2025-08-06T08:41:11","guid":{"rendered":"https:\/\/www.newsbeep.com\/ca\/49076\/"},"modified":"2025-08-06T08:41:11","modified_gmt":"2025-08-06T08:41:11","slug":"the-american-economy-is-shockingly-dependent-on-ai","status":"publish","type":"post","link":"https:\/\/www.newsbeep.com\/ca\/49076\/","title":{"rendered":"The American Economy Is Shockingly Dependent on AI"},"content":{"rendered":"

Despite the world-historic amount of hot air coming from corporate America\u2019s AI obsession, there is something happening in our physical reality beneath all this hype around chatbots that lie to you: a firehose of spending on AI infrastructure. Alphabet, Google, Amazon and Meta will spend almost $400 billion<\/a> this year on capital expenditures (capex) like new data centers, more than the European Union spent on defense last year. McKinsey estimated<\/a> that total AI capex will be $6.7 trillion by 2030. Famed tech founder Paul Kedrosky wrote<\/a> that \u201cAI capex is so big that it\u2019s affecting economic statistics, boosting the economy, and beginning to approach the railroad boom.\u201d<\/p>\n

\u201cThe labor market might be softening. Housing and construction activity remain muted due to high mortgage rates. Tariffs could slow consumer spending,\u201d continued Kedorsky. \u201cYet the biggest, most important companies in the stock market are pot-committed and continue to spend like your drunk friend in Vegas who just went to the ATM for the third time before midnight.\u201d<\/p>\n

AI capex is so important it now surpasses the engine of the American economy, consumer spending, which typically comprises about 70 percent of GDP.<\/p>\n

We now spend more on datacenters and such than we do on retail, wholesale and related service industries.<\/p>\n

AI capex is the most important economic driver in America today. Jason Thomas of the investment firm Carlyle estimated<\/a> that AI capex was responsible for a third of America\u2019s second quarter economic growth. Without it, we would have a slowing economy defined by Trump\u2019s trade war\u2019s depressed demand. The new ISM manufacturing survey today came in below expectations at 50.1, implied a 4 percent inflation rate, and sits about as low in expansion territory as it gets before it flips into contraction (49.9). These charts are what creeping stagflation<\/a> looks like.<\/p>\n

This was a *very* bad report. Employment down, implies ~4% annualized core PCE, and demand is clearly weak given new orders.<\/p>\n

*US JULY ISM SERVICES PMI FALLS TO 50.1 FROM 50.8; EST. 51.5<\/p>\n

[image or embed]<\/a><\/p>\n

\u2014 George Pearkes (@peark.es<\/a>) August 5, 2025 at 8:04 AM<\/a><\/p>\n

Growth would be weaker without the AI capex boom. Probably a lot weaker. Economic changes are not linear, so removing one variable affects all the others, but needless to say, if the greatest consumer spending economy in the history of mankind now sees more growth from AI capex than consumer spending, AI capex is vital to our current economic health.<\/p>\n

The simple answer to how this economic regime change seemed to unfold so quickly under our noses is that the largest companies ever started spending more than ever very quickly. Large Language Models (LLMs) require massive amounts of computing power and energy, necessitating a gargantuan investment in physical infrastructure, as the Wall Street Journal\u2019s Christopher Mims excellently detailed<\/a> in \u201cSilicon Valley\u2019s New Strategy: Move Slow and Build Things.\u201d Meta has gone from renaming their company around a fake world no one will ever visit to bragging about building out a data center across an area the size of Manhattan. The world has changed pretty dramatically in the last few years.<\/p>\n

The logical question is what if this AI bubble pops, and it likely means \u201cwatch out below?\u201d as Kedorsky so aptly states. The math is simple enough and Trump\u2019s 1934-esque tariffs<\/a> are restrictive enough<\/a> that if something that comprises a larger share of the economy than freakin\u2019 consumer spending is removed, the economy will likely tank.<\/p>\n

However, the magnificent seven companies (Microsoft, Nvidia, Amazon, Meta, Tesla, Alphabet, Apple) investing in all this infrastructure that is driving the stock market to all-time highs and creating a wealth effect that also helps prop up consumer spending<\/a> would like you to think about what if it works out! I was taught in finance school that if you pay for basic infrastructure for your business, that these huge investments should produce proportionally sizeable returns in the future, growing the economy in a much more organic fashion than trillion-dollar companies spamming the \u201cbuild more data centers\u201d button. We should be thinking about the beginning of a boom, not a bust!<\/p>\n

But AI has a demand problem<\/a>, and the amount of people truly using it often is very much in question. As Ed Zitron has documented<\/a>, the subscription as a service (SaaS) products offered by companies like Microsoft tie into their AI products, creating a much higher floor of demand than would likely exist in a world where companies weren\u2019t propping themselves up. LLMs also have a basic economic problem where they function like the opposite of the code that builds Facebook, where it becomes more expensive to scale the product alongside more users. Despite its helpful abilities in specific areas, AI is still very much a product searching for a market. OpenAI loses money on its users<\/a>, and a lot of this capex spending is financed by debt on the backs of companies whose valuations have risen by trillions over the past year because of the AI boom. If this doesn\u2019t work out, it will get ugly for the magnificent seven, as Morgan Stanley calculated<\/a> a \u201cfinancing gap\u201d of $1.5 trillion between capex and company cash flows over the next three years. It\u2019s already getting ugly for one of them<\/a>.<\/p>\n

\u201cDuring the first half of the year investment-grade borrowing by tech firms was 70 percent higher than in the first six months of 2024,\u201d wrote<\/a> The Economist. \u201cIn April Alphabet issued bonds for the first time since 2020. Microsoft has reduced its cash pile but its finance leases\u2014a type of debt mostly related to data centres\u2014nearly tripled since 2023, to $46bn (a further $93bn of such liabilities are not yet on its balance-sheet). Meta is in talks to borrow around $30bn from private-credit lenders including Apollo, Brookfield and Carlyle. The market for debt securities backed by borrowing related to data centres, where liabilities are pooled and sliced up in a way similar to mortgage bonds, has grown from almost nothing in 2018 to around $50bn today.\u201d<\/p>\n

Relentlessly hyping up a debt-financed product that doesn\u2019t make money while resting atop 2008-style collateral debt obligations, what could go wrong!<\/p>\n

Investment in information processing equipment and software rose at a 25 percent<\/a> annual rate in the first six months of 2025, while GDP growth was 1.2 percent. America\u2019s technically negative first quarter growth<\/a> may have been actually negative without AI capex, and we might already be in a recession. Whether we want it to or not, the United States needs AI to financially succeed, we have literally bet our economy on it.<\/p>\n

<\/p>\n

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The Truth Hurts<\/p>\n","protected":false},"excerpt":{"rendered":"Despite the world-historic amount of hot air coming from corporate America\u2019s AI obsession, there is something happening in…\n","protected":false},"author":2,"featured_media":49077,"comment_status":"","ping_status":"","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[11],"tags":[45,49,48,46],"class_list":["post-49076","post","type-post","status-publish","format-standard","has-post-thumbnail","category-economy","tag-business","tag-ca","tag-canada","tag-economy"],"_links":{"self":[{"href":"https:\/\/www.newsbeep.com\/ca\/wp-json\/wp\/v2\/posts\/49076","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.newsbeep.com\/ca\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.newsbeep.com\/ca\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/ca\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/ca\/wp-json\/wp\/v2\/comments?post=49076"}],"version-history":[{"count":0,"href":"https:\/\/www.newsbeep.com\/ca\/wp-json\/wp\/v2\/posts\/49076\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/ca\/wp-json\/wp\/v2\/media\/49077"}],"wp:attachment":[{"href":"https:\/\/www.newsbeep.com\/ca\/wp-json\/wp\/v2\/media?parent=49076"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.newsbeep.com\/ca\/wp-json\/wp\/v2\/categories?post=49076"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.newsbeep.com\/ca\/wp-json\/wp\/v2\/tags?post=49076"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}