Is AI investment a boost or a drag on economic growth?

Investing.com -- Artificial intelligence has been hailed as a transformative force, with economists arguing that today’s investment will result in stronger economic output in the coming years. From that perspective, AI should support long-term growth by expanding productive capacity.

“The exuberance around artificial intelligence should be based on an expectation that investing today will generate higher economic output in the future,” UBS economist Paul Donovan said in a note.

In the near term, the impact is more complex. Investment itself directly lifts GDP because it is counted as economic activity.

The construction of data centres, the scaling of digital infrastructure and the hiring of engineers all add to current output and have already helped support U.S. growth. That effect is similar to any capital expenditure cycle.

However, AI adoption also draws heavily on existing resources, which can suppress growth elsewhere.

Donovan highlights research showing that regional electricity prices have risen significantly in areas where data centres are expanding power demand.

“Consumers who have to spend more on electricity will have less money to spend on other goods and services,” he said. “Energy-intensive businesses will face higher costs.”

Higher energy costs also weigh on businesses that are not part of the AI supply chain. For energy-intensive sectors, this diversion of resources raises operating costs and threatens profitability.

Donovan warns that “weaker demand and higher costs may cause some otherwise productive businesses to close,” creating what it describes as a potential gap in the economic growth narrative.

The risk is that economically viable parts of today’s economy could be displaced before AI delivers its promised productivity gains.

AI has become the defining theme of this market cycle. Scale has emerged as the key advantage, with U.S. tech giants pouring billions into AI infrastructure and investors rushing to secure a place in what already feels like a crowded trade.

The group often referred to as the Magnificent Seven now accounts for a record 36% of the S&P 500’s total market capitalization.

Although the surge in AI-related capital expenditure over the past year only amounts to around 1% of national output, its influence on growth has been disproportionately large.

The rapid buildout of data centers and digital infrastructure — spending that has quadrupled since 2020 — is feeding directly into construction activity and boosting industrial demand across several supply chains.

At the same time, household consumption, which drives most of U.S. GDP, is being reinforced by wealth effects from sharply higher equity prices.

The powerful gains in benchmark indexes, driven heavily by megacap technology names and two years of AI-driven enthusiasm, have become a meaningful support for spending in the broader economy.

Whether this represents the early stages of a durable technological shift or the makings of a speculative bubble is currently one of the central debates shaping both equity sentiment and the broader U.S. economic outlook.