Illusion of prosperity? Wall Street warns: The U.S. economy is overly tied to AI, and a slowdown in investment could trigger a recession.

Illusion of prosperity? Wall Street warns: The U.S. economy is overly tied to AI, and a slowdown in investment could trigger a recession.

The US economy's reliance on artificial intelligence investment has reached a dangerous level. The sharp fluctuations in AI-related stocks last week revealed a broader risk: if the AI boom turns into a bubble burst, it could drag the entire economy into recession.

On November 24, it was reported that AI-related investments may have contributed nearly half of the US real GDP growth in the first half of this year. The capital expenditure of Microsoft, Amazon, Alphabet, and Meta is expected to reach $344 billion this year, equivalent to 1.1% of GDP. At the same time, the rise in AI stocks has boosted household wealth, thereby stimulating growth in consumer spending.

However, this reliance is making the economy more vulnerable. BCA Research chief global strategist Peter Berezin said, "Without the AI boom, the economy would likely have already fallen into recession."

The S&P 500 Index fell about 2% last week, and market worries about an AI bubble are heating up. Analysts warn that once AI investment slows or stock prices plummet, a reverse wealth effect may be triggered, ultimately pushing the fragile labor market into recession.

AI Investment Becomes the Sole Engine of Economic Growth

Reports indicate that AI-related investment has become the core pillar supporting the US economy.

Bank of America estimates that the capital expenditure of Microsoft, Amazon, Alphabet, and Meta is projected to reach $344 billion this year, equal to 1.1% of GDP, a significant increase from last year's $228 billion.

Barclays estimates that investment in software, computer equipment, and data centers will boost annualized GDP growth by about one percentage point in the first half of 2025, with most of that coming from AI investment.

Although chips sold by companies like Nvidia account for the bulk of AI spending, most need to be imported, so when calculating domestic output, this must be deducted. Even so, AI spending in the first half of the year still raised annualized output growth by 0.8%, while GDP’s annualized growth rate for the period was 1.6%. This means that without the growth in AI-related spending, economic growth would have been just a weak 0.8%.

Bank of America economist Stephen Juneau said bluntly, "This is currently the only source of investment."

According to data from Deutsche Bank, excluding AI categories, US private sector investment has barely grown since 2019. Although job growth in September exceeded expectations, overall job creation has slowed this year, and unemployment is rising slowly.

Stock Market Wealth Effect Amplifies Economic Risks

The surge in AI stocks has provided extra support to the economy through the wealth effect.

Calculations by JPMorgan Chase show that just the rise in AI stock prices over the past year increased consumer spending by 0.9%, or about $180 billion. While this accounts for only a small proportion of the 5.6% non-inflation-adjusted consumer growth in the 12 months ending August, considering consumption accounts for about two-thirds of annual output, this contribution is still significant.

However, this dependence presents huge risks. Stock price-earnings ratios have reached near historical highs. The S&P 500 Index fell about 2% last week due to bubble fears, although it rebounded 1% on Friday. If lofty earnings expectations prove incorrect, stock prices could plummet, driving investment down.

Meanwhile, minutes from the Federal Reserve's October policy meeting show some officials expressed concern about falling stock prices, "especially in the event that the potential of AI-related technology is suddenly reassessed."

Barclays senior US economist Jonathan Millar estimates that a stock market decline of 20% to 30% could lower the GDP growth rate by 1 to 1.5 percentage points over about a year. If AI investment stops growing, it could further drag down growth by 0.5 percentage points; if it drops to zero, it could drag it down by a full percentage point.

Additionally, BCA's Berezin said the already weak economy increases the likelihood that a collapse in the stock market and AI spending could trigger a recession. "If you take a fragile labor market and give it a kick with a collapse in capital spending, you’re very likely to get a recession."

Although September job growth beat expectations, overall job creation has slowed this year, and unemployment is rising slowly. In contrast to the tech job surge during the dot-com bubble of the late 1990s, AI’s impact on the labor market is much smaller.

Debt Expansion Plants Hidden Dangers

The rapid growth in AI-related borrowing poses another source of risk.

After Oracle's recent $18 billion bond issuance, its total debt has exceeded $100 billion, with some of the funds possibly used for AI infrastructure. Companies like CoreWeave, which rent data centers and lease servers to tech companies, are also massively expanding through borrowing.

BCA Research's Berezin warns that if the income needed to repay the debt fails to materialize, lenders may suffer losses, which could spread to the debt market.

Although the scale of AI-related debt is not enough to directly trigger a financial crisis, the complexity of financial markets means that problems in one sector may indirectly hurt others.

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