Artificial Intelligence Boom's Hidden Risk to the Economy

Chips, data centers cost tech companies a fortune, sparking comparisons with the dotcom era

- Greg Ip

In the past two weeks, one big tech company after another reported blowout earnings amid a wholesale embrace of artificial intelligence.

Look a little closer, and a more unsettling side to the AI boom emerges. All the spending on chips, data centers, and other AI infrastructure is draining American corporations of cash.

This underscores the hidden risks from the AI boom. No one doubts its potential to raise growth and productivity in the long run. But financing that boom is straining the companies and capital markets.

Since the first quarter of 2023, investment in information processing equipment has expanded 23%, after inflation, while total gross domestic product has expanded just 6%. In the first half of the year, information processing investment contributed more than half the sluggish 1.2% overall growth rate. In effect, AI spending propped up the economy while consumer spending stagnated.

Much of that investment consists of the graphics-processing units, memory chips, servers, and networking gear to train and run the large language models at the heart of the boom. And all that computing power needs buildings, land, and power generation.

This is transforming big tech's business models.

For years, investors loved those companies because they were "asset-light." They earned their profits on intangible assets such as intellectual property, software, and digital platforms with "network effects." Users flocked to Facebook, Google, the iPhone, and Windows because other users did.

Adding revenue required little in the way of more buildings and equipment, making them cash-generating machines.