AI is distorting practically everything about the economy

Subscribe to enjoy similar stories.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 gross domestic product, next year’s figure would exceed projected spending on national defense.This 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 GDP. 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 fell in housing, business structures such as office buildings and factories, and transportation equipment like trucks and aircraft. 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%,