AI Investments Driving Economic Growth in the U.S.

In the United States, the growth of the economy is increasingly fueled by investments in artificial intelligence (AI).

Many consumers engage with AI daily through tools like ChatGPT or when they receive summarized search results from major platforms like Google and Apple. People also see AI-generated content on social media.

However, the real engine behind the economic growth is not just these applications. It lies in the significant investments aimed at expanding the infrastructure needed to support AI technologies. This includes building data centers, developing advanced computer chips, enhancing information processing equipment, and upgrading electricity transmission systems.

Ed Yardeni, president of Yardeni Research, emphasizes that a direct effect of AI on the economy can be seen in the increased capital spending by tech companies on the hardware and software required to boost their cloud-computing capabilities. This is essential to meet the growing demand for AI computing power.

Nevertheless, the financial gains from this AI investment surge have largely been concentrated and have not translated into widespread job growth.

Despite the limited impact on jobs, the stock market has experienced remarkable gains. Skanda Amarnath, executive director of Employ America, points out that spending on AI technologies accounted for approximately 16% to 20% of the real gross domestic product (GDP) growth in the third quarter of 2024. This trend shows no signs of slowing down. AI-related investments are poised to outstrip the GDP contributions seen during the late 1990s dot-com boom and may rival the housing market’s impact during the 2000s bubble, as noted in Amarnath’s article in Bloomberg News.

As Amarnath highlights, "We’re starting to see it show up in the data. It’s something that means it’s more macro relevant and will probably be a tailwind for growth in 2025."

Many technologists advocate for AI, claiming it could revolutionize business productivity and be one of the most significant advancements in history. Currently, the notion of 'fear of missing out' (FOMO) seems to be driving much of the current investment cycle, rather than immediate monetary profits. Sam Altman, CEO of OpenAI, expressed in a blog that "superintelligent tools could massively accelerate scientific discovery and innovation well beyond what we are capable of doing on our own, and in turn massively increase abundance and prosperity."

Conversely, some experts are cautioning against potential 'bubbles' similar to those seen during past financial periods that ultimately led to market downturns. Jim Covello from Goldman Sachs noted, “Over-building things the world doesn’t have use for, or is not ready for, typically ends badly.”

As investment in AI continues, significant announcements highlight the momentum in this sector. For instance, President-elect Donald Trump recently unveiled a $20 billion project to build new data centers in collaboration with a wealthy UAE developer. In addition, Amazon's AWS announced an $11 billion plan for AI investments in Georgia, while Microsoft revealed it would allocate $80 billion to AI-enabled data centers for its fiscal 2025. Another landmark was Softbank's announcement of a staggering $100 billion plan for AI investments in the United States.

The influence of AI on the stock market has been profound, with the Magnificent Seven tech companies—Amazon, Apple, Alphabet (Google's parent company), Meta Platforms (Facebook and Instagram), Microsoft, Nvidia, and Tesla—collectively experiencing an average stock increase of 63% last year, and Nvidia soaring by an impressive 171%. These companies now represent a third of the S&P 500 index's total value.

In 2023, about a third of all startup funding was directed towards AI-related ventures, marking the highest percentage ever recorded, according to Crunchbase.

The surge in AI investment has also positively impacted utilities and infrastructure companies, with many seeing a notable increase in stock prices.

Despite these advancements, a significant influx of new jobs has yet to emerge. Some of the announced investments suggest that tens of thousands of jobs could materialize, but there are concerns about AI's potential role in automating existing jobs. Technologies tend to displace roles, and surveys indicate that many tasks formerly carried out by humans might eventually be handled by AI.

Currently, the construction industry has benefitted from this investment wave, reporting annual job growth exceeding 2.5%. Spending on data center construction has risen by 43.1% year over year.

Additionally, utility sector employment has reached heights not seen in over two decades. However, sectors like professional and business services, which typically gain from tech investments, have seen stagnation. Job postings for traditional software engineering roles have fallen below pre-pandemic levels.

Ed Yardeni remarked, “It hasn’t created a huge employment boom. AI increases the productivity of programmers, so maybe on balance we’re not going to see a big increase in the number of programmers hired.”

Overall, the U.S. economy—and, by extension, the stock market—appears to be banking heavily on the anticipated benefits of AI. One financial executive humorously noted, “I jokingly say sometimes, we leveraged the entire retirement of America to Nvidia’s performance.” This highlights the reliance on AI and its related sectors to drive future profits.

Academics agree that while there is optimism regarding AI's potential to enhance productivity, the timeline for actual public benefits remains uncertain. Tania Babina from Columbia Business School stated, "These investments are costs... So hopefully the benefits will be broader in scale, and not just to these tech leaders."

AI, Investments, Economy