U.S. News -- Capital Account: AI Distorts Most Economic Measures

“Until recently, artificial intelligence was a welcome tailwind for U.S. growth.

 

We're beyond that now. AI is more like a hurricane-strength weather system making itself felt across the entire economy. It is distorting the stock market, profits, the speed and composition of economic growth, trade, and even our moods -- especially about the job market.

 

AI's pervasive presence makes it almost impossible to discern what is actually going on. It is swamping the effects of tariffs and the war with Iran, events that would ordinarily be category-5 storms in their own right.

 

The boom itself is in uncharted territory. Morgan Stanley now sees capital spending by the five largest AI "hyperscalers" topping $800 billion this year and $1.1 trillion next year.

 

At 3.3% of GDP, next year's figure would exceed projected spending on national defense.

 

Which raises a fascinating question: what if the AI boom went away? Not the technology itself, which is here to stay, but the accompanying frenzy.

 

The usual answer is that an AI bust would crater the economy. But after taking into account its distortions, don't be so sure.

 

Start with the broadest measure of growth, inflation-adjusted gross domestic product. It grew a respectable 2% annualized in the first quarter. Beneath the surface, though, are two economies: AI, and everything else.

 

Personal consumption, the biggest component of GDP, grew a relatively muted 1.6%. Investment in housing, business structures such as office buildings and factories, and transportation equipment like trucks and aircraft, fell. Meanwhile, investment soared 43% in tech equipment, 23% in software, and 22% in data center buildings.

 

My back-of-the-envelope estimate is that the AI economy grew 31%, the non-AI economy just 0.1%. David Sacks, President Trump's AI czar, predicts AI will add two percentage points to economic growth this year.

 

But wait: while AI is distorting economic growth, its contribution to that growth is itself distorted. A lot of AI spending goes toward imported equipment such as advanced semiconductors, rather than domestic production. Ernie Tedeschi, chief economist at Stripe, using more sophisticated analysis than mine, calculates gross computer spending contributed 1.7 percentage points of the first quarter's 2% growth. Net out imports, and that drops to just 0.4 point.

 

This points to something else AI is distorting: international trade. It's why U.S. imports rose so much in the first quarter, causing the trade deficit to widen, and why Taiwan's trade surplus has reached an almost unthinkable 24% of GDP. Kospi, the South Korean stock index which is home to semiconductor giants Samsung Electronics and SK Hynix is up 78% this year. So while Trump wants tariffs to shrink the U.S. trade deficit and other countries' surpluses, the opposite is happening. Without AI, he might have got his way.

 

One reason higher energy prices haven't stopped the S&P 500 from hitting a new high is that the "Magnificent Seven," tech companies that account for over a third of its market capitalization, have stormed back. The index is up 7% since the start of the Iran war. Weighting all 500 companies equally, the index actually fell slightly.

 

The AI reality distortion field has engulfed more than the Mag-7. Intel stock recently surpassed the all-time high set during the dot-com bubble in 2000. This is not because the company has overcome its strategic problems; it is floundering against Nvidia in graphical processing units, which drive AI, and against Taiwan Semiconductor Manufacturing in making chips for outside customers. Rather, the central processing units in which Intel specializes are in big demand by data centers. A similar halo effect has lifted the entire chip sector, including AMD, Micron and Sandisk.

 

The AI distortion goes beyond stock prices to profits. Total S&P 500 earnings are on track to rocket 27% higher in the first quarter, FactSet estimates, But profits for the Mag-7 alone will be up 61%; for the other 493, just 16%, a figure itself inflated by semiconductor companies like Micron.

 

This is skewing the division of the economic pie between capital and labor. As profits gallop ahead, labor compensation (wages and benefits) grew just 3.1% annualized in the first quarter, and actually shrank 0.5% after inflation, the Labor Department reported Thursday.

 

Labor's share of total business sector output fell to 54.1%, the lowest since records began in 1947.

 

AI thus feeds the disconnect between what the data say and how people feel. It lifts the spirits of businesses and investors, while doing the opposite for workers.

 

Scientists and companies keep touting all the tasks AI can do better than humans, while companies announcing layoffs such as Coinbase and Snap cite the efficiencies of AI. At companies adopting AI, 23% of employees expect their jobs to be eliminated in five years, according to Gallup. Maybe this is why wages are subdued: if you fear losing your job to a robot, you're less likely to demand a raise.

 

This gloom, though, looks like yet another distortion. Some studies see jobs lost to AI, but hard evidence is pretty thin, even in vulnerable occupations such as software development. Private sector layoff announcements are actually running below levels of a year ago. As for the companies citing AI for job cuts, that probably sounds a lot better than admitting to management failures.

 

Suppose the world decided to stop spending so much on AI and the boom turned to bust. We would have an economy free of AI's distortions, not free of AI.

 

Overall U.S. growth would slow, but less than you might think. Just 33 counties account for 72% of data centers, so a construction drought wouldn't ripple that widely.

 

Stocks and profits would fall but the average worker, who depends more on wages than wealth, would be barely affected. And their moods might improve if their bosses talk less about doing everything with AI.” [1]

 

1. U.S. News -- Capital Account: AI Distorts Most Economic Measures. Ip, Greg.  Wall Street Journal, Eastern edition; New York, N.Y.. 08 May 2026: A2.