The year 2025 is surprising many seers because we have enjoyed moderate economic growth despite all of the headwinds created by wars, tariffs, sticky inflation, uncertainty regarding immigration, and so on. However, lurking below the surface is an interesting phenomenon that is of some concern.
Essentially all of this year’s economic growth is attributable to two segments of the economy. At least half has been driven by AI related capital spending on items such as data centers, chips, and other processing equipment. Recently, Harvard economist Jason Furman published an estimate that the actual figure could be as high as 92%. In total, global spending on AI infrastructure may have reached a staggering $1.5 trillion in 2025.
The other key driver of economic growth has been surprising strength in consumer spending. However, that strength has been largely confined to those at the top. In fact, the top 10% of earners accounted for roughly 50% of all retail spending. This confirms what some have termed the K economy in which those at the top end of the wealth spectrum are faring quite well while the majority of the population is financially stressed.
Why is this reliance on two sectors of concern? First, AI will undoubtedly change the world but there is a risk that the current surge in spending is excessive and not sustainable. Recalling the Dot.Com bubble, much of the internet infrastructure sat idle for a number of years due to overbuilding and a number of the tech companies that installed it failed. Moreover, a great deal of the enduring value was created not by the infrastructure companies but by companies that integrated the internet into their business strategy. It may be different this time but a review of the Dot.Com era is instructive. Second, a good deal of the consumer spending by the wealthy has been spurred by what economists call the wealth effect. Because they own assets, this segment is spending freely having benefited from rising stock and home prices. Given that AI stocks represent about 40% of the value of the S&P 500, any problems in the AI sector could have a significant impact on the overall stock market which would in turn dampen consumer spending by the wealthy. So, it is conceivable that we could simultaneously get a gut punch to the two primary drivers of economic growth. There is no reason to panic but we would all sleep better if other sectors joined the party.