Massive AI spending has a ‘crowding out’ effect that could slow other sectors, top economist says

Economy·Artificial IntelligenceMassive AI spending has a ‘crowding out’ effect that could slow other sectors, top economist saysBy Jason MaBy Jason MaWeekend EditorJason MaWeekend EditorJason Ma is the weekend editor at Fortune, where he covers , the economy, finance, and housing.SEE FULL BIO The COL4 AI-ready data center in Columbus, Ohio.Eli Hiller—For The Washington Post via Getty ImagesHundreds of billions of dollars in AI investments are pouring into the economy annually, helping fuel GDP growth but with some negative implications for other sectors, according to Neil Dutta, head of economic re at Renaissance Macro Re

For example, the rush to build data centers raises concerns that it could make housing construction harder

So much money is chasing the artificial intelligence boom that it has an outsized effect on economic growth, but it could also be having negative side effects on other sectors, according to Neil Dutta, head of economic re at Renaissance Macro Re

Speaking on the RiskReversal Podcast with Guy Adami and Dan Nathan last week, Dutta pointed out that AI-related capital expenditures have contributed more to GDP growth so far this year than consumer spending has

While consumer spending accounts for two-thirds of total GDP, its growth has been muted this year as Americans become more nervous the economy and their employment amid President Donald Trump’s trade war

By contrast, AI spending has continued to soar with giants ramping up with investments in a mad dash to achieve supremacy, moving the needle more on GDP

Alphabet, Microsoft, Amazon and Meta Platforms alone are expected to spend $400 billion on capex this year, and most of that is going to AI. “I have a lot of different competing ideas in my head what it all means, but right now the one that I find most compelling is that there’s a bit of crowding out associated with what’s going on with AI,” Dutta said

For example, AI data centers are sucking up massive amounts of electricity, stressing the grid and leading some utilities to hike rates as they try to keep up with infrastructure upgrades

In fact, some data centers could require more electricity than entire cities, including those the size of Pittsburgh or Cleveland

In parts of the Midwest and Southeast, where there’s more spare land to build giant data centers, utility bills are rising substantially for ratepayers, eating into their disposable income and weighing on consumer spending, Dutta warned

Un in China, where there is an oversupply of electricity, stress on the power grid is a limiting factor to U.S. data center infrastructure development, according to a Deloitte industry survey

And not only do data centers require more electricity, they also represent immense construction jects that could come at the expense of building, Dutta said. “We’re notoriously undersupplied in our housing market,” he added. “Does that mean it’s going to be even more difficult for us to build s?” To be sure, the overall market for new s has cooled off substantially this year as mortgage rates remain high, and builders are pulling back on activity

But given the concentration of data-center construction in certain areas, individual local housing could see tighter conditions

Meanwhile, there’s also the impact of the AI spending tsunami on financial

As the behemoths announce bigger investments in AI, Wall Street appears to be rewarding them by boosting their stock prices. “So that just begets more investment, and that kind of creates upward momentum in the in the stock market and that keeps rates elevated,” Dutta explained

In other words, overall financial conditions loosen as s rally, potentially causing the Federal Reserve to set policy tighter than it might otherwise have done

Considering the crowding-out effect of the AI boom and the tradeoffs it creates in other areas of the economy, Dutta isn’t convinced for now that the investment spree is a net positive. “It’s not doing much to the real economy, at least not yet,” he said. “Ultimately, investment only makes sense insofar as it raises ductivity and real wages and consumer spending

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