AI Investment Surge Creates Economic Uncertainty as Fed Grapples with 'Bifurcated' Economy

AI clouds up the economic dashboard

LONDON, Nov 10 (Reuters) - The return of U.S. economic data when Washington reopens may do little to clear up a macro picture that is clouded by the dash for artificial intelligence and compounded by trade distortions. Federal Reserve officials are doing their best at the guessing game on what comes next - but it is just that. The more humble in the Fed's ranks concede that it's impossible to tell. Cleveland Fed boss Beth Hammack, a known hawk and a voting member of the Fed's policymaking council next year, said the AI investment frenzy and related stock price surges complicated matters by creating something of a dual economy, with higher earners and asset holders doing well even as cost-of-living pressures weigh on the rest. In short, she reckons the Fed is walking a policy high wire and can't lean much in either direction. "When you see this bifurcation, it's really difficult for monetary policy," Hammack told the Economic Club of New York last week. "Bifurcated economy" is the phrase of the moment. Consumer price inflation is still well above target and rising, and financial conditions are the loosest in years - but layoffs are rising, in part due to AI adoption. An economy creating few jobs that is still clocking annualized GDP growth of 4% - at least with the limited data the Atlanta Fed model has to go on - is a fiendishly difficult one to navigate. How much impact AI is having on the labor market, or how much it will have in the future, remains uncertain. But it's conceivable that we could see job creation grind to a halt next year, while hundreds of billions of dollars in AI investment boosts top-line GDP and the mounting electricity demand puts upward pressure on prices. Precise measurement of all that is fraught with difficulty. For example, AI-related spending supposedly accounted for more than two-thirds of U.S. annualized GDP growth of 1.6% in the first half of the year, leaving the rest of the economy limping along. And yet, tariff-dodging volatility may well have distorted that picture, while AI-related stock rallies probably contributed to resilient consumption among the richer cohorts. Morgan Stanley's economists reckon most of the business spending this year has been in 'intermediate' goods such as chips, which are not included in GDP. The bank also added that when you exclude imports of computers, servers and chips, the AI spend accounted for just 0.3 points of that first-half expansion. 'MORE INTANGIBLE'? So much for the math. Unfortunately for policymakers, this sort of statistical fog is likely to plague economic forecasting for some time to come. In a report last week, economists at the Institute of International Finance in Washington zoomed in on this AI-related "bifurcation". It showed capex in information processing equipment and software did grow at an annualized rate of 26% in the first six months while the rest of the economy barely moved. But it pointed out that the categories identified as "AI-related capex" are very blurry. For example, they include things like medical equipment and office supplies but exclude data center building, research and grid investment. "The investment and trade data together highlight a deeper structural shift: the U.S. economy is becoming more intangible," the IIF said, adding that national accounts are poorly equipped to measure the value generated by software, data management and intellectual property. At the same time, training AI language models and curating algorithms are only partly recorded as investment. And their effects on productivity, speed and innovation remain difficult to capture. "These gaps mean that official statistics simultaneously overstate AI's immediate GDP contribution and understate its broader economic impact," the IIF concluded. And this "mismeasurement" complicates policy calibration. It risks understating productivity, overestimating economic slack and increasing complacency regarding inflationary pressures. Putting the number-crunching to one side, the ultimate question remains how quickly AI will diffuse through the wider economy. "If AI adoption remains concentrated among a handful of hyperscalers and specialized firms, returns will likely plateau, leaving overall growth vulnerable once the current investment cycle peaks," the IIF report said. As the Fed's Hammack said on Thursday, the AI boom could mirror what happened with the internet build-out more than 25 years ago, leading to a structural economic change that's not well suited to monetary policy changes. For investors, the big bet on an AI future may still seem to be the only game in town - unless markets have priced the bulk of it into leading stocks already. And that evokes memories of the peak of the dotcom bubble in 2000. The real economic impact may not be clear for years. The opinions expressed here are those of the author, 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. Plus, sign up for my weekday newsletter, Morning Bid U.S. by Mike Dolan; editing by Our Standards: The Thomson Reuters Trust Principles., opens new tab * Suggested Topics: * U.S. Markets Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias. Mike Dolan Thomson Reuters Mike Dolan is Reuters Editor-at-Large for Finance & Markets and a regular columnist. He has worked as a correspondent, editor and columnist at Reuters for the past 30 years - specializing in global economics and policy and financial markets across G7 and emerging economies. Mike is based in London but has also worked in Washington DC and in Sarajevo and has covered news events from dozens of cities across the world. A graduate in economics and politics from Trinity College Dublin, Mike previously worked with Bloomberg and Euromoney and received Reuters awards for his work during the financial crisis in 2007/2008 and on Frontier Markets in 2010.

Capital Economics flags two big questions dominating the AI-macro debate By Investing.com

Investing.com -- Capital Economics says two issues have increasingly dominated client discussions this year as artificial intelligence reshapes investor concerns. According to the firm's group chief economist, Neil Shearing, "two questions have come to the fore." The first is whether rapid AI adoption is already weakening labour demand, especially for younger workers. The second is said to be whether the surge in AI-related capital spending is "a rational response to opportunity, or a classic case of overinvestment that stores up financial trouble for later." On the labour side, Capital Economics argues the narrative that AI is displacing junior workers "looks too neat." The firm notes that youth unemployment has risen fastest in Canada and parts of Europe, "economies that haven't been at the forefront of the AI revolution." It also highlights that several of these trends "were already in motion before the AI boom began." Even in sectors most exposed to AI automation, such as IT, the data show "little consistent evidence of mass displacement of workers." Weaker hiring instead reflects broader labour-market loosening, degree inflation and post-pandemic unwinding in the tech sector. The second question, how to think about AI investment, is "more complicated," Capital Economics says. Much of the debate, it argues, is being muddied by confusion between nominal and real investment. While enormous spending plans by hyperscalers have raised fears of overreach, the firm notes that "booms like these almost always involve some degree of overreach" and that even failed projects can leave behind infrastructure that is ultimately valuable. Capital Economics adds that rising leverage tied to AI is a risk "worth watching," though overall debt levels remain manageable. The firm concludes investors may be entering a phase where "parts of the AI investment surge are excessive and will eventually correct" while the broader economic effects "could still be profoundly positive."

AI Infrastructure: A New Pillar of Economic Growth | Investing.com UK

Artificial intelligence (AI) makes daily headlines, and investors are questioning if businesses' AI-related investment can continue at this pace. The money spent on data centers, software, and other AI-related investments reveal the structural shifts occurring in the economy. The latest on Commercial & Industrial (C&I) Loans gives us insights into the sustainability of this trend. If an economy wants to encourage innovation, entrepreneurship, and scientific development, businesses need a stable macro environment with price stability, strong property rights, and dynamic capital markets that can fund great ideas. AI-related business investment is rapidly becoming a cornerstone of U.S. economic growth, marking a structural shift in how expansion is financed and sustained. In the first half of 2025, investment in information-processing equipment and software -- largely driven by AI infrastructure -- is a small yet mighty slice of the economy, yet contributed a majority to economic growth during that period. This surge is being led by hyperscalers, like Microsoft, Amazon, Meta, and Alphabet, which are collectively projected to spend hundreds of billions on AI-related capital expenditures this year. The boom includes massive data center construction, hardware purchases, and early-stage investments in supporting infrastructure like power grids. While the full economic impact is still unfolding, AI investment has already outpaced traditional growth drivers like consumer spending, suggesting a fundamental restructuring of the economy's growth model. AI-related capital spending is expected to play an even larger role, and not just in tech, but across sectors adapting to automation, data-driven decision-making, and productivity enhancement. The reordering of international trade this year intensifies the pressure on domestic firms to improve productivity and lower input costs. AI is part of that process. Business spending on intellectual property products, which includes software as well as any research and development spending, boosted economic growth by the largest amount in the history of the data going back to 1947. The "Intellectual Property Added Historic Level to Growth in Q2" chart illustrates the 0.8 percentage point contribution to gross domestic product (GDP), and if we include computer and peripheral equipment, the numbers are more staggering. Together, these AI-related categories contributed 1.5 percentage points to the 3.8% annualized growth in the second quarter. Business investment in intellectual property could continue to have an outsized role in the economy in the years to come. One question plaguing investors is if the surge in capital expenditures will continue. And for that, we pay attention to what the banks tell us about loan demand, especially for commercial and industrial (C&I) loans often used for capital spending. In Q3 2025, banks reported stronger loan demand from large and middle-market firms. Small firms saw little change in loan demand. A set of special questions within the report highlighted a key driver was firms' increased investment needs for inventory management due to trade-related tensions. This suggests that businesses may be leveraging loans to build out domestic supply chains and investing in technologies like AI to manage pricing and inventory challenges. Businesses are responding to global supply chain disruptions and tariff uncertainties by tapping credit markets to fund investments in automation and AI, aiming to reduce trade exposure and boost operational efficiency. The latest growth figures revealed that intellectual property products grew to roughly 7% of the U.S. economy. Over the past three decades, this category grew from under 2% to where it is today. This small but mighty portion of our economy is fueling growth and could become an even greater part of our economy. If an economy wants to encourage innovation, entrepreneurship, and scientific development, businesses need a stable macro environment with price stability, strong property rights, and dynamic capital markets that can fund great ideas. Construction Cash Converging On Data Centers A popular expression in the capital market is "money flows where it's treated best." In this context, we could say "capital is flowing toward AI because that's where expected productivity gains are the strongest." Businesses are increasingly channeling investment into AI infrastructure, tools, and talent, not just to stay competitive but to redefine productivity itself. This isn't a passing trend; it's a structural shift in the economy, where dollars are chasing data, algorithms, and automation. As firms seek higher returns and long-term efficiency, AI-related spending is emerging as a key driver of growth, innovation, and transformation across industries. Capital spending on nonresidential structures, which include a wide range of buildings from offices to hospitals, has declined for the past two years. The bright spot is in data centers. The Census Bureau first broke out data center construction as a distinct line item in its Monthly Construction Spending report in July 2025, released on September 2, 2025. This addition reflects the growing economic significance of data center investment, particularly as AI-related infrastructure spending surges. The new categorization allows for more precise tracking of capital flows into digital infrastructure, which has become a key driver of nonresidential private construction. There is room for more expansion in AI-related capital spending, despite some calling this overextended. A more near-term concern is the lingering impact of the historic lapse in appropriations. Since the government shutdown has lasted long enough to prevent the Bureau of Labor Statistics (BLS) from collecting price data, the agency needs a backup plan. Instead of leaving a gap in the data, the BLS could estimate missing months by using data from surrounding months, a method called interpolation. However, applying it to an entire price index -- rather than just a few items -- is largely uncharted territory. According to recent reports, the BLS will likely work closely with other agencies to ensure any estimates are statistically sound, but it's a scenario they've rarely had to navigate. Despite the lack of visibility as of now, the weakening job market could bring the Federal Open Market Committee (FOMC) to cut rates in December, giving in to what the markets would like to see and potentially appeasing tech-heavy investors. That said, we remain tactically neutral on the information technology sector, where many of these AI names are concentrated, and overweight U.S. large cap growth equities. Given tech's concentration in large U.S. indexes (~8.4% of the S&P 500, and ~13.7% of the Russell 1000 Growth Index), current positioning provides exposure to the AI theme while continuing to be wary that a market increasingly reliant on a handful of tech giants could amplify volatility and concentration risk going forward. We maintain our tactical neutral stance on equities. Investors may be well served by bracing for occasional bouts of volatility given how much optimism is reflected in stock valuations, but fundamentals remain broadly supportive. Our regional preferences across the U.S., developed international, and emerging markets (EM) are aligned with benchmarks. We still favor growth over value, large caps over small caps, and the communication services and financials sectors. Within fixed income, we hold a neutral weight in core bonds, with a slight preference for mortgage-backed securities (MBS) over investment-grade corporates. We believe the risk-reward for core bond sectors (U.S. Treasury, agency MBS, investment-grade corporates) is more attractive than plus sectors. We do not believe adding duration (interest rate sensitivity) at current levels is attractive and remains neutral relative to benchmarks.