Data centers are unpopular — and a key motor of economic growth
The political backlash against data centers is intensifying, threatening to choke off a critical source of U.S. investment, according to economists.
Data centers are facing controversy and are crucial drivers of economic growth, according to Wall Street analysts. The influx of capital into artificial intelligence, encompassing data centers, cutting-edge chips, and networking equipment, has propelled business investment and financial markets in recent times. Federal Reserve researchers estimated that spending on data centers, power stations, and other AI-related technological equipment constituted about 20% of U.S. gross domestic product in the previous year.
By 2026, spending by major hyperscalers like Alphabet, Amazon, Meta, and Microsoft — entities striving to construct data centers — is projected to double to approximately $800 billion and reach $1 trillion by 2027, as per Capital Economics. While tempering that expansion could benefit the public, considering the prevalent opposition to data centers, reducing this cash flow would have adverse economic repercussions, said economist Allison Schrager of the Manhattan Institute.
The Democrats' triumphs in the midterm elections might simultaneously slow down and escalate the cost of data center development across the U.S., but these victories are unlikely to completely halt the money flow, as political opposition to data centers is not monolithic. Investment in data centers is expected to persist in the short term, both for ongoing projects and for facilities with approved permits.
The primary concern for AI-oriented companies will be sustaining similar capital expenditures as the anticipated productivity gains and profits from AI remain largely unfulfilled. Capital Economics chief North America economist Stephen Brown cautioned that the capital required for sustained CapEx is unlikely to grow to $2 trillion in revenue for major AI firms by the early 2030s, citing a probable slowdown in data center construction.
Moody's Analytics chief economist Mark Zandi noted that while investors may continue pouring money into AI for the next few years, the long-term outlook remains uncertain. If AI investment declines in 2028, it could turn into a significant drag on GDP, with a 10% annual decrease in AI spending potentially shaving around 0.1% off GDP growth.
The wealth effect stemming from AI stocks, which has already boosted economic growth this year by roughly 0.5%, may dissipate if data center construction slows, leading to a potential 1% hit to GDP growth if the S&P 500 were to decline by 20%.
Written by urgent.news from CBS News's reporting — not their text. Machine-written — may contain errors; check the original before relying on it.
