Massive AI spending has a ‘crowding out’ effect that could slow other sectors, top economist says

Jason MaBy Jason MaWeekend Editor
Jason MaWeekend Editor

    Jason Ma is the weekend editor at Fortune, where he covers markets, the economy, finance, and housing.

    The COL4 AI-ready data center in Columbus.
    The COL4 AI-ready data center in Columbus.
    Eli Hiller—The Washington Post/Getty Images
    • Hundreds of billions of dollars in AI investments are pouring into the economy annually, helping fuel GDP growth but with some negative implications for other sectors, according to Neil Dutta, head of economic research at Renaissance Macro Research. For example, the rush to build data centers raises concerns that it could make housing construction harder.

    So much money is chasing the artificial intelligence boom that it has an outsize effect on economic growth, but it could also be having negative side effects on other sectors, according to Neil Dutta, head of economic research at Renaissance Macro Research.

    Speaking on the RiskReversal Pod with Guy Adami and Dan Nathan last week, Dutta pointed out that AI-related capital expenditures have contributed more to GDP growth so far this year than consumer spending has.

    While consumer spending accounts for two-thirds of total GDP, its growth has been muted this year as Americans become more nervous about the economy and their employment amid President Donald Trump’s trade war.

    By contrast, AI spending has continued to soar with tech giants ramping up investments in a mad dash to achieve supremacy, moving the needle more on GDP. Alphabet, Microsoft, Amazon, and Meta Platforms alone are expected to deploy $400 billion in capital expenditures this year, and most of that is going to AI.

    “I have a lot of different competing ideas in my head about what it all means, but right now the one that I find most compelling is that there’s a bit of crowding out associated with what’s going on with AI,” Dutta said. 

    For example, AI data centers are sucking up massive amounts of electricity, stressing the grid and leading some utilities to hike rates as they try to keep up with infrastructure upgrades. In fact, some data centers could require more electricity than entire cities, including those the size of Pittsburgh or Cleveland.

    In parts of the Midwest and Southeast, where there’s more spare land to build giant data centers, utility bills are rising substantially for ratepayers, eating into their disposable income and weighing on consumer spending, Dutta warned.

    Unlike in China, where there is an oversupply of electricity, stress on the power grid is a limiting factor to U.S. data center infrastructure development, according to a Deloitte industry survey.

    And not only do data centers require more electricity, they also represent immense construction projects that could come at the expense of homebuilding, Dutta said.

    “We’re notoriously undersupplied in our housing market,” he added. “Does that mean it’s going to be even more difficult for us to build homes?”

    To be sure, the overall market for new homes has cooled off substantially this year as mortgage rates remain high, and homebuilders are pulling back on activity. But given the concentration of data-center construction in certain areas, individual local housing markets could see tighter conditions.

    Meanwhile, there’s also the impact of the AI spending tsunami on financial markets. As the tech behemoths announce bigger investments in AI, Wall Street appears to be rewarding them by boosting their stock prices.

    “So that just begets more investment, and that kind of creates upward momentum in the stock market, and that keeps rates elevated,” Dutta explained.

    In other words, overall financial conditions loosen as shares rally, potentially causing the Federal Reserve to set policy tighter than it might otherwise have done.

    Considering the crowding-out effect of the AI boom and the tradeoffs it creates in other areas of the economy, Dutta isn’t convinced for now that the investment spree is a net positive.

    “It’s not doing much to the real economy, at least not yet,” he said. “Ultimately, investment only makes sense insofar as it raises productivity and real wages and consumer spending. That’s not yet happening.”

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