Is AI Holding The Entire American Economy Together?

Image – Britt Leckman
Article reviewed by Randall Corcoran, Economics Teacher at Farmingdale High School

Artificial Intelligence has been a sector undergoing rapid growth in recent years, both in technological advances and in equity markets. In fact, the “Magnificent 7” technology stocks, Amazon, Alphabet (Google and its subsidiaries), Microsoft, Apple, Tesla, Meta, and NVIDIA, have drastically outperformed the S&P 500 (an index tracking the 500 largest companies in America) for more than 5 years. According to Bloomberg via BNY Mellon, the Magnificent 7 gained +271.13% from 2019 to 2023, including some individually staggering gains such as NVIDIA’s growth of +1383.81%. In contrast, the S&P 500 gained +90.27% in that same period. In 2023 alone, the Magnificent 7 gained +75.71%, whereas the S&P 500 gained +24.23%.

This trend of rapid growth for technology stocks, particularly those involved in AI, has continued through 2024 and for the first half of 2025. According to Fortune Magazine, Deutsche Bank and Bain & Co. both warn that these levels of growth are most likely unsustainable. Global Head of Foreign Exchange Research at Deutsche Bank, George Saravelos, says “…in order for the tech cycle to continue contributing to GDP growth, capital investment needs to remain parabolic. This is highly unlikely…growth is not coming from AI itself but from building the factories to generate AI capacity”. Additionally, Bain & Co. estimated that there will be an $800 billion shortfall in the revenues needed to fund the demand for AI computing power. “AI machines—in quite a literal sense—appear to be saving the U.S. economy right now…In the absence of tech-related spending, the U.S. would be close to, or in, recession this year” said Saravelos. GDP is an abbreviation for Gross Domestic Product, a measure used by economists to calculate the value of a country’s goods and services and is used as a metric of a country’s overall economic health. According to the U.S. Bureau of Economic Analysis, GDP grew by +3.8% in Q2 2025, beating estimates of +3.3%, while GDP decreased by -0.6% in Q1 2025. Overall, GDP growth for the first half of 2025 was +1.59%, but Harvard economist Jason Furman calculated that without data centers, GDP only grew +0.1% this year. According to Furman, “Investment in information processing equipment & software is 4% of GDP. But it was responsible for 92% of GDP growth in the first half of this year.” In addition to the fact that AI now accounts for the majority of American GDP growth, job growth has continued to slow, although not decreasing, a reflection of the stagnation of the broader U.S. economy aside from AI. According to the U.S. Bureau of Labor Statistics, nonfarm payrolls, the measure used to calculate U.S. job growth, increased by a mere +22,000 in August 2025. Additionally, the unemployment rate and number of unemployed people changed very little as well. In fact, these figures have barely changed throughout the entire year so far, a continuation of the trend of nonfarm payroll stagnation we saw in 2024.

This data comes at a time where a highly unusual market trend has recently been observed: gold rallying and outperforming NVIDIA, the Nasdaq, and the S&P 500 year to date. According to a chart published by MUFG Capital Markets strategists in September, “Gold has historically demonstrated low or [opposite] correlation with risk assets including equities, [high yield] bonds and emerging market stocks. Typically, gold’s safe haven attributes outperform during systemic risk events, equity market corrections or periods of heightened volatility…Key drivers of gold’s unexpected and historic rally in 2025…include: de-dollarization and diversification strategies by global investors; record pace of central bank purchases [globally]; US policy uncertainty…; elevated geopolitical risk; deceleration in the global economy; persistent global inflation and the Fed’s pivot toward [increasing the dollar supply and decreasing interest rates] (and related US Dollar weakness).” According to researchers at JPMorgan, de-dollarization, “a significant reduction in the use of dollars in world trade and financial transactions”, is becoming increasingly visible in the global economy as the share of U.S. dollars in central bank foreign exchange reserves “has slid to a two-decade low”, “the share of foreign ownership in the U.S. [bond] market has fallen over the last 15 years”, and “a large and growing proportion of energy is being priced in non-dollar-denominated contracts” in commodity markets.

If the economy is relatively weak without technology and AI representation, what happens when the bubble bursts? Researchers at Deutsche Bank say that it already has, just not in the way you may think. “One AI bubble has already burst – the bubble in saying there’s a bubble…Peak [Google searches for] “AI bubble” was on Aug 21, shortly after a little-understood report from MIT appeared to say that hardly any organisations were getting a return from their investment in AI, and OpenAI CEO Sam Altman said investors might be getting “over excited”, prompting a 3.8 percent pullback in the Magnificent Seven tech stocks over five days. Since then, the number of web searches worldwide for “AI bubble” has fallen to 15 percent of that level. “AI boom” reached its own high a week earlier, at 40 percent of the “AI bubble” peak…Bubbles have a variable lifespan, with the South Sea bubble blowing itself out in seven months while the dot-com bubble took five years to pop.”

The future is unclear; it simply is not possible to predict the markets, and the result of the AI bubble bursting could look drastically different depending on when it happens. Matter of fact, the bubble may not even be as big as we think. “Hawkish investors are ready to pounce on canaries in the coalmine that suggest the AI boom is over – or just overhyped. The summer gave them several opportunities, enhanced by low liquidity and underlying concerns about the economy and rates…It’s clear there is a lot of hype…But valuations by most ratios still look more sober than those for hot stocks at the height of the dot-com bubble. Back then, the Nasdaq more than tripled in less than 18 months to March 2000 before losing three quarters of its value by late 2002. This time there are fewer stocks directly affected by the boom and they generally have much more established business models, longstanding customer bases and lower debt levels than their dot-com bubble predecessors”, according to Deutsche Bank researchers.

So, is AI actually holding the entire American economy together? Such a troubling question is debatable. The AI sector’s staggering growth has been able to mask the underlying stagnation of the American economy combined with warning signs in commodity, foreign exchange, and fixed income bond markets. This raises questions on whether our economy is dangerously lopsided, relying on one sector’s growth to offset the stagnation elsewhere, and that would be a particularly vulnerable economic position to be in. Uncertainty surrounding both policy decisions by the Trump administration and investor confidence in our financial markets accurately reflects how unclear the economic situation in the United States really is. Strategists at MUFG Capital Markets say conditions such as a weakened U.S. dollar, a more pro-deal regulatory environment, as well as tech and AI driven activity have contributed to the strongest cross-border M&A (mergers & acquisitions) activity since 2021. Suggesting that a burst in the AI bubble could send the rest of the American economy crashing down, through unmasking underlying economic stagnation and potentially toppling this uptick in M&A deal flow, is a valid concern at this time.

Sources:

Policy Scope