Long read: How AI Conquered the US Economy: A Visual FAQ

Trump’s trade policy was widely expected to be negative for the US economy and markets, some even suggesting a stagflationary scenario for the US as tariffs create inflation which in turn eat into consumer spending and hence drag on growth. Yet, neither has panned out and markets continue to be on a tear, hitting all-time highs. What explains? AI, as Derek Thompson begins this piece:

“The American economy has split in two. There’s a rip-roaring AI economy. And there’s a lackluster consumer economy.

You see it in the economic statistics. Last quarter, spending on artificial intelligence outpaced the growth in consumer spending. Without AI, US economic growth would be meager.

You see it in stocks. In the last two years, about 60 percent of the stock market’s growth has come from AI-related companies, such as Microsoft, Nvidia, and Meta. Without the AI boom, stock market returns would be putrid.

You see it in the business data. According to Stripe, firms that self-describe as “AI companies” are dominating revenue growth on the platform, and they’re far surpassing the growth rate of any other group.”

Derek goes on to elaborate with a visual FAQ of sorts asking the following questions and answering them with charts and data:

“So, what exactly is the artificial intelligence boom? How did it happen, where did all this money to build AI come from, who is using the technology, and is it making people more productive?”

First, what exactly is the AI boom?

“In the last six months, the four companies investing the most in artificial intelligence—Meta, Google, Microsoft, and Amazon—spent between $100 billion and $200 billion on chips, data centers, and the like.”

The chart showing the growth in these spends at these quantums is mindboggling indeed and hence this piece needs to be read in its entirety.

He then shows how big a deal this is in historical context:
“This is either the biggest tech-infrastructure project since the 1960s (since the beginning of the computer age) or the 1880s (the heyday of the railroad age).

In January, JP Morgan’s Michael Cembalest calculated that the leading AI chip manufacturer Nvidia is on pace to capture the highest share of market-wide capital spending since IBM’s peak revenues in 1969. Not to be outdone, the economic writer Paul Kedrosky has calculated that AI capital expenditures as a share of GDP have already exceeded the dot-com boom and are now approaching levels not seen since the railroad build-out of the Gilded Age.”

Where did all the money come from?

“These firms’ existing business models—whether it’s ads for Meta or search ads for Google—are strong enough to generate stupid amounts of money to throw at the next generation of technology. “They’re generating unprecedented amounts of free cash flow,” Cembalest told me. “They make oodles and oodles of money, which is why they can afford to be pouring hundreds of billions of dollars of capital spending each year into AI-related R&D and infrastructure.””

How do these companies intend to make a return on these investments?

Whilst he acknowledges it isn’t clear yet, but shows early signs why these companies are bullish about the use case for all that AI infrastructure they are building:

“As for the bull case: The payments company Stripe is already seeing evidence that AI startup revenue is exceeding the growth rate of any previous generation of technology. “AI companies are reaching revenue milestones faster than previous generations of startups,” the company announced in a recent report. “The top 100 AI companies on Stripe achieved annualized revenues of $1 million in a median period of just 11.5 months—four months ahead of the fastest-growing SaaS companies.””