The AI Boom’s Hidden Risk to the Economy
The build-out of artificial-intelligence infrastructure is costing a fortune, straining companies and capital markets
by Greg Ip, The Wall Street Journal, Aug. 2, 2025
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All the spending on chips, data centers and other AI infrastructure is draining American corporations of cash.
This underscores the hidden risks from the AI boom. No one doubts its potential to raise growth and productivity in the long run. But financing that boom is straining the companies and capital markets.
The AI boom props up growth
Since the first quarter of 2023, investment in information processing equipment has expanded 23%, after inflation, while total gross domestic product has expanded just 6%. In the first half of the year, information processing investment contributed more than half the sluggish 1.2% overall growth rate. In effect, AI spending propped up the economy while consumer spending stagnated.….
For now, investors are pricing big tech as if their asset-heavy business will be as profitable as their asset-light models. …
Corporations face steep investment needs to exploit AI and reshore production to avoid tariffs. Thomas estimates that since 2020, their cumulative free cash flow has been 78% lower, relative to GDP, than in the equivalent period following 2009.
All this suggests that interest rates need to be substantially higher in the years ahead than in the years before the pandemic. That is another risk to the economy and these companies that investors may not fully appreciate. [end quote]
“Asset heavy” means that a company has invested a large amount in plant and equipment. Many manufacturing companies are asset heavy. The big tech companies are investing huge amounts in land, buildings and electronic equipment (graphics-processing units, memory chips, servers, and networking gear) to run the AI programs.
In the past, many high tech companies were “asset light.” They earned their profits on intangible assets such as intellectual property, software, and digital platforms with “network effects.” The high valuations of the stocks discussed on Saul’s board were based on their high free cash flows since they had relatively little capital expenditures.
The immense amount of money being spent on the AI build-out has already impaired the free cash flows of Alphabet, Amazon, Meta and Microsoft. OpenAI and Anthropic, the two leading stand-alone developers of large language models, though growing fast, are losing money.
Whether and when AI will eventually lead to increased profits has yet to be seen. The very high valuations are supported by an asset light business model which could collapse if the market realizes it’s no longer appropriate.
While the asset light companies contributed their free cash to the marketplace, helping to hold interest rates down, now they are borrowing.
There’s still plenty of liquidity sloshing around in the system as evidenced by the loose financial conditions.
But the combination of increased capital spending for AI and increasing government deficits could pressure long-term interest rates higher.
Wendy