AI investment boom may be papering over US economic cracks: Mike Dolan
By Mike Dolan
LONDON, Oct 15 (Reuters) - Strip away the AI blanket and you may find the rest of the economy shivering underneath. Even if the reality is less stark, the latest research shows AI heat in national accounts is mirrored by cold spots elsewhere.
There's little doubt about the contribution to overall US gross domestic product from the frenzied boom in AI investment, financing and infrastructure building.
Most estimates show that about a third of economic growth over the past couple of years is due to the AI buildout, and almost a quarter of all US imports last year were AI-related goods.
And, depending on how you define it, AI-related stocks now account for about half of the S&P 500 .SPX market capitalization.
But New York Federal Reserve economist Julian di Giovanni this week focused on the fact that the surge in AI-related imports over the past two years had not materially widened the trade and current account deficits, as might be expected.
In explaining why, he framed the issue in terms of how the current account is a balance of savings and investment, suggesting an investment spending spree or a jump in tech equipment imports need not affect the overall balance if domestic savings are sufficient to fund the additional investment.
In economics terms, the current account balance is a country's gross savings minus its gross domestic investment.
Mapping savings and investment over the past six years since the COVID-19 pandemic shows the current account gap did indeed widen up to early last year, but has since narrowed during a wave of tariffs from the incoming Donald Trump administration.
However, most of the widening deficit of recent years was due to a drop in savings rather than gross investment spending, di Giovanni points out in the Liberty Street Economics blog.
In fact, aggregate investment as a share of GDP has been basically unchanged for eight years at just under 22% and has shown no particular change since the AI capital expenditure boom took off in earnest after 2023. Gross domestic investment averaged 21.3% of GDP in the five years before the pandemic and 21.5% in the three years since the ChatGPT launch that sparked the frenzy.
PHANTOM INVESTMENT BOOM?
Di Giovanni's main point is that while investment in information technology, equipment and software has risen, it has been offset by declines elsewhere, including weaker factory construction since 2022, residential investment and spending on structures and equipment outside data centers and technology equipment.
Household saving is down slightly in recent years, due in part to wealth effects from higher equity values, but it's fallen much less than it did during the dotcom expansion in the late 1990s. Business saving has barely fallen, unlike the dotcom era, and that's likely due to the drawdown so far of hefty cash positions by the hyperscalers doing the bulk of the capex.
Government "dis-saving", or widening government budget deficits, has moved in the opposite direction over the past few years and marks another stark contrast to the late 1990s boom.
Government dis-saving accounts for 1.75 points of the 2.4 percentage-point increase in the current account deficit since the pandemic, with falling private savings adding about half a point and business investment contributing next to nothing.
"Changes in fiscal policy have been the major driver of current account dynamics, with a smaller role played by private saving and no discernible investment channel," di Giovanni concluded, adding the caveat that a ramping up of debt- and equity-financed spending from here could yet change the picture.
Beyond the balance of payments dynamics, though, the obvious question is just how much relative weakness the AI boom is covering up and how much of a cyclical downswing the economy and markets might now be suffering in its absence.
With so much riding on AI delivering, the temptation is to treat it as "too big to fail." But if a sudden slowdown in the AI boom, an accident or shock in financing, or a massive stock sell-off were to hit, the economy would go south along with it — and it's not hard to see why.
https://www.reuters.com/graphics/AI-POWER/klvyrqxazpg/chart.png
(The opinions expressed here are those of Mike Dolan, a columnist for Reuters.)
Enjoying this column? Check out Reuters Open Interest (ROI), your essential new source for global financial commentary.
Follow ROI on LinkedIn, and X.
And listen to the Morning Bid daily podcast on Apple, Spotify, or the Reuters app. Subscribe to hear Reuters journalists discuss the biggest news in markets and finance seven days a week.