Trump isn't behind all of the looming economic catastrophes. (Sometimes it's his tech bro pals.)

"Capex spending for AI contributed more to growth in the U.S. economy in the past two quarters than all of consumer spending"

 

 

 

These pieces from Paul Kedrosky and the Wall Street Journal have gotten a lot of attention over the past few days, but as worrisome as they might be in isolation, they look far worse in the context of August 2025.

The big takeaway here—a finding reached independently by numerous highly respected analysts—is that capital expenditures on generative AI are the main thing currently propping up the GDP. And that the source of some of that money has left certain financial institutions, particularly life insurance companies (and no, I did not see that one coming), vulnerable to sudden downturns.

Honey, AI Capex is Eating the Economy  

We now have a possible answer. In a sense, there is a massive private sector stimulus program underway in the U.S.. There is an AI datacenter spending program, one that is reallocating gobs of spending, as well as injecting even more. It is already larger than peak telecom spending (as a percentage of GDP) during the dot-com era, and within shouting distance of peak 19th century railroad infrastructure spending.

So, how big was this "stimulus" in the first quarter? Back of ... something or another, based on the above figures:

• Without AI datacenter investment, Q1 GDP contraction could have been closer to –2.1%
• AI capex was likely the early-2025 difference between a mild contraction and a deep one, helping mask underlying economic weakness.

Conclusion

We are in a historically anomalous moment. Regardless of what one thinks about the merits of AI or explosive datacenter expansion, the scale and pace of capital deployment into a rapidly depreciating technology is remarkable. These are not railroads—we aren’t building century-long infrastructure. AI datacenters are short-lived, asset-intensive facilities riding declining-cost technology curves, requiring frequent hardware replacement to preserve margins.

And this surge has unintended consequences. Capital is being aggressively reallocated—from venture funding to internal budgets—at the expense of other sectors. Entire categories are being starved of investment, and large-scale layoffs are already happening. The irony: AI is driving mass job losses well before it has been widely deployed.

 h/t Noah Smith.

 Chris Mims writing for the WSJ:

 

The Magnificent 7 tech firms have collectively spent a record $102.5 billion on capex in their most recent quarters, nearly all from Meta, Alphabet (Google), Microsoft and Amazon. (Apple, Nvidia and Tesla together contributed a mere $6.7 billion.)…

Investor and tech pundit Paul Kedrosky says that, as a percentage of gross domestic product, spending on AI infrastructure has already exceeded spending on telecom and internet infrastructure from the dot-com boom—and it’s still growing. He also argues that one explanation for the U.S. economy’s ongoing strength, despite tariffs, is that spending on IT infrastructure is so big that it’s acting as a sort of private-sector stimulus program…

Capex spending for AI contributed more to growth in the U.S. economy in the past two quarters than all of consumer spending, says Neil Dutta, head of economic research at Renaissance Macro Research, citing data from the Bureau of Economic Analysis.

 I'm no finance guy, so I'm certainly getting some of the subtleties wrong, but very smart people with excellent track records in the field are getting concerned about all this, especially given the growing signs that we’re looking at a massive bubble in the sector.

 From Ed Zitron:

As I write this, NVIDIA is currently sitting at $170 a share — a dramatic reversal of fate after the pummelling it took from the DeepSeek situation in January, which sent it tumbling to a brief late-April trip below $100 before things turned around. 

The Magnificent 7 stocks — NVIDIA, Microsoft, Alphabet (Google), Apple, Meta, Tesla and Amazon — make up around 35% of the value of the US stock market, and of that, NVIDIA's market value makes up about 19% of the Magnificent 7. This dominance is also why ordinary people ought to be deeply concerned about the AI bubble. The Magnificent 7 is almost certainly a big part of their retirement plans, even if they’re not directly invested.

Back in May, Yahoo Finance's Laura Bratton reported that Microsoft (18.9%), Amazon (7.5%), Meta (9.3%), Alphabet (5.6%), and Tesla (0.9%) alone make up 42.4% of NVIDIA's revenue. The breakdown makes things worse. Meta spends 25% — and Microsoft an alarming 47% — of its capital expenditures on NVIDIA chips, and as Bratton notes, Microsoft also spends money renting servers from CoreWeave, which analyst Gil Luria of D.A.Davidson estimates accounted for $8 billion (more than 6%) of NVIDIA's revenue in 2024. Luria also estimates that neocloud companies like CoreWeave and Crusoe — that exist only to prove AI compute services — account for as much as 10% of NVIDIA's revenue.

NVIDIA's climbing stock value comes from its continued revenue growth. In the last four quarters, NVIDIA has seen year-over-year growth of 101%, 94%, 78% and 69%, and, in the last quarter, a little statistic was carefully brushed under the rug: that NVIDIA missed, though narrowly, on data center revenue. This is exactly what it sounds like — GPUs that are used in servers, rather than gaming consoles and PCs (. Analysts estimated it would make $39.4 billion from this category, and NVIDIA only (lol) brought in $39.1 billion. Then again, it could be attributed to its problems in China, especially as the H20 ban has only just been lifted. In any case, it was a miss!

NVIDIA's quarter-over-quarter growth has also become aggressively normal — from 69%, to 59%, to 12%, to 12% again each quarter, which, again, isn't bad (it's pretty great!), but when 88% of your revenue is based on one particular line in your earnings, it's a pretty big concern, at least for me. Look, I'm not a stock analyst, nor am I pretending to be one, so I am keeping this simple:

• NVIDIA relies not only on selling lots of GPUs each quarter, but it must always, always sell more GPUs the next quarter.
• 42% of NVIDIA's revenue comes from Microsoft, Amazon, Meta, Alphabet and Tesla continuing to buy more GPUs.
• NVIDIA's value and continued growth is heavily reliant on hyperscaler purchases and continued interest in generative AI.
• The US stock market's continued health relies, on some level, on five or six companies (it's unclear how much Apple buys GPU-wise) spending billions of dollars on GPUs from NVIDIA.
  • An analysis from portfolio manager Danke Wang from January found that the Magnificent 7 stocks accounted for 47.87% of the Russell 1000 Index's returns in 2024 (an index fund of the 1000 highest-ranked stocks on FTSE Russell’s index).

In simpler terms, 35% of the US stock market is held up by five or six companies buying GPUs. If NVIDIA's growth story stumbles, it will reverberate through the rest of the Magnificent 7, making them rely on their own AI trade stories.

 ...

I realize this sounds a little simplistic, but by my calculations, NVIDIA's value underpins around 8% of the value of the US stock market. At the time of writing, it accounts for roughly 7.5% of the S&P 500 — an index of the 500 largest US publicly-traded companies. A disturbing 88% of Nvidia’s revenue comes from enterprise-scale GPUs primarily used for generative AI, of which five companies' spend makes up 42% of its revenue. In the event that any one of these companies makes significant changes to their investments in NVIDIA chips, it will eventually have a direct and meaningful negative impact on the wider market. 

This would be bad even in the best of economic times, but given our erratic and incompetent administration and the multitude of looming crises and their potential for nasty interactions—and even cascading failures—this has the potential to be very bad indeed.

Quick side note for a future post: one of these days we’re going to start a serious thread on the abundance movement and the dangers of credulously accepting its claims. When we get there, remind me to bring this up, because throwing money at generative AI has always been a big part of the sales pitch.