AI boom is US’ economic counterweight

AS US President Donald Trump’s second term unfolds, the American economy presents a paradoxical picture. While traditional economic indicators flash warning signals – rising inflation, weakening employment and growing consumer anxiety – the nation’s gross domestic product continues to show respectable growth.

The explanation lies in an unprecedented surge of artificial intelligence (AI) investment that has emerged as the single most important force propping up economic expansion.

The scale of AI’s economic impact

Global AI spending is projected to reach US$375 billion in 2025 and US$500 billion by 2026, fuelling GDP growth and market optimism. This investment boom has become so dominant that in the first half of 2025, AI-related capital expenditures contributed 1.1 per cent to GDP growth, outpacing the US consumer as an engine of expansion.

To put this in perspective, investment in information processing equipment and software is equivalent to only 4 per cent of US GDP, but was responsible for 92 per cent of GDP growth in the first half of 2025.

Analysis from Deutsche Bank argued that without AI-related investment, the US economy might already be in a recession.

Meanwhile, Trump’s economic policies have created challenges. The Trump tariffs amount to an average tax increase per US household of US$1,200 in 2025 and US$1,600 in 2026. Trump’s imposed tariffs are expected to reduce US GDP by 0.6 per cent before accounting for foreign retaliation.

In an October paper, economists found that the inflation rate would have been drastically lower at 2.2 per cent, had it not been for Trump’s tariffs. Current inflation stands at 3 per cent, a full percentage point above the Federal Reserve’s target and representing a reversal of progress made earlier in the year.

Job growth in the US has slowed from an average of 150,000 per month at the start of 2025 to just 25,000 by August. Economists attribute this to a combination of “slower immigration, reduced government hiring and federal contract funding, and elevated uncertainty”, costing the economy 100,000 jobs monthly.

The small business sector has been particularly hard hit. This creates a troubling two-tier economy where tech giants and large corporations weather the storm while Main Street businesses fight for survival.

Economists warn that without AI-driven investment, the US may already be in a recession, raising concerns about economic dependency.

First, the benefits are highly concentrated. AI companies have accounted for 80 per cent of the gains in US stocks so far, while the S&P 500 subgroups that include consumer discretionary and consumer staples companies have increased by less than 5 per cent year to date.

Second, the investment may be unsustainable. The International Monetary Fund (IMF) has cited the AI investment boom as one of the key factors propping up US and global growth, but warned the added investment and consumption are helping to elevate demand and inflation pressures without associated productivity gains.

Third, there are serious questions about whether this represents a bubble. The IMF’s chief economist forecast that the bust would be less likely to be a systemic event that would crater the US or global economy, but noted many similarities between the late 1990s Internet stock bubble and the current AI boom. The current AI boom is creating valuations and market concentrations that exceed even the dotcom era.

The rush to build data centres also raises concerns that it could make housing construction harder, as resources flow towards tech infrastructure at the expense of addressing America’s housing shortage.

Additionally, in parts of the Midwest and Southeast, utility bills are rising substantially, weighing on consumer spending, as data centres strain electrical grids.

The AI boom has undeniably provided crucial support to the American economy. However, this creates a precarious balancing act. The economy has become dangerously dependent on a single sector that employs relatively few workers, creates concentrated wealth, and may itself be overvalued.

Meanwhile, the underlying weaknesses such as sticky inflation, weakening employment, struggling small businesses and rising costs for ordinary Americans, continue to worsen.

The fundamental question is sustainability. Can AI investment continue at its current breakneck pace long enough for other sectors to recover? Will the promised productivity gains from AI eventually materialise to justify current valuations? And can the economy withstand the shock if the AI boom falters before Trump’s economic policies are reformed?

For now, America’s economic fate rests heavily on the continued enthusiasm of tech titans to spend tens of billions per quarter on AI infrastructure. It is a narrow foundation upon which to build economic prosperity, and one that offers little comfort to the millions of Americans struggling with higher prices, uncertain employment, and an economy that increasingly feels like it is working for Silicon Valley rather than Main Street.

The irony is profound: Trump’s signature economic policies have created conditions that would ordinarily produce recession, but an unprecedented technological investment boom – concentrated in the hands of the very tech elite he often criticises – has kept growth positive. The AI boom is not just counterbalancing Trump’s economic downsides; it has become the only thing preventing them from overwhelming the economy entirely.