There is a growing risk of economic overheating in the US as the artificial intelligence boom expands beyond semiconductors and spills into the broader economy — never mind the tame wage growth and house prices that would typically point in the opposite direction. If AI spending continues apace, accompanied by a rising stock market, there’s likely no way to avoid a widening pickup in inflation.
This marks a shift from last year when AI optimism was roughly offset by weakness in other parts of the economy, leading to a K-shaped dynamic that Americans have generally disliked.
More than $700 billion in capital spending by four technology behemoths alone this year is creating new winners and new bottlenecks as it spreads through the economy. Add to that an energy supply shock that businesses didn’t have to worry about even three months ago and it’s hardly surprising that bond markets are taking notice, driving up borrowing costs for households and companies.
The broadening out of AI spending has been a three-year process. Nvidia Corp. was the main immediate beneficiary of the launch of OpenAI’s ChatGPT in late 2022, which boosted demand for the company’s high-powered chips and helped it unseat Microsoft Corp. at the top of the S&P 500 Index. Next came data centers as companies realized the enormity of what AI represented. The insatiable demand for computing power has since hit electrical infrastructure, grid equipment and power generation equipment.
This AI infrastructure spending was, until recently, twinned with weakness in other parts of the industrial economy.
Residential investment has been in the doldrums since 2022, while inflation-adjusted spending on office buildings is at the lowest level in 15 years. Construction spending in manufacturing dropped 20% over the past 18 months as President Donald Trump ended much of the Biden administration’s support for green industries. Crude oil prices below $60 a barrel as recently as the start of this year cooled off the oil and gas sector.
It’s also important to note that conviction in the scale of the AI investment cycle has wavered at times. The “DeepSeek moment,” in early 2025, briefly raised the possibility that more compute-efficient models would allow for a cheaper buildout. “Liberation Day” tariffs, proposed last April, were another short shock to the system as was the first month of the war with Iran.
But the industry was in some ways caught off guard by how rapidly Anthropic PBC’s Claude products were adopted this year, driving a renewed intensity in capex plans.
The outlook for the industrial economy now appears more solid than it’s been since the Fed began raising interest rates in 2022, thanks to Alphabet Inc., Amazon.com Inc., Microsoft and Meta Platforms Inc. Their spending spree is boosting not just semiconductor stocks such as Advanced Micro Devices Inc. and memory companies including Micron Technology Inc., but also the energy equipment company GE Vernova Inc., where orders grew 71% last quarter from a year earlier, and Caterpillar Inc., where power generation sales grew 48%. In a sign of the times, Ford Motor Co. is getting into the grid-battery business to tap into the AI boom.
Manufacturing surveys point to a pickup as well. The new orders component of the Institute for Supply Management’s manufacturing report has come in stronger in each of the past four months than it’s been at any point since the first half of 2022.
An argument could be made in the recent past that none of this was finding its way into core inflation, which excludes volatile energy and food prices. Somewhat elevated readings have largely reflected one-time effects from tariffs and lags in things like shelter inflation. Wage growth for workers has continued to cool — at less than 4% now, it’s similar to the late 2010s when inflation wasn’t a concern — and real-time measures of apartment rents and home prices have shown very little inflation at a national level.
That’s what makes some of the more recent data worrisome. Overall job growth has picked up in 2026, with important cyclical industries such as manufacturing and construction showing headcount growth. Housing market activity also appears to be accelerating in May despite higher mortgage rates, with stock-market wealth one potential source of the increase in home sales.
Computer software and accessories have made a meaningful contribution to the core personal consumption expenditures deflator — a favored Fed inflation measure — in the five months through April, according to Inflation Insights President Omair Sharif. A category worth a little more than 1% of the index weight has accounted for about 18% of the average monthly increase in core inflation, he wrote in a report Tuesday, adding that further increases are likely since memory- and storage-related categories “show no sign of slowing down.”
The billions of dollars flowing into these components, data-center construction, electrical equipment and power generation alongside trillions of dollars of value creation in the stock market will eventually overwhelm the cyclical weakness we’ve had in the labor market and industrial sector over the past few years. That time might be now.
We still need a few pieces to fall into place for the full picture to emerge. Job market sentiment is still in the doldrums, and a sharp pullback in tech stocks could quickly cool investment plans. Failing that, the assumption should be that a continued capex and stock market boom will put the K-shaped economy to bed and awaken an inflation impulse that policymakers and politicians will no longer be able to wish away.
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