ROI-AI may be rocket fuel for US stocks, less so for GDP: McGeever

Wall Street is not the economy, so we are ​told. Nowhere is this clearer than the AI revolution, which is firing US stocks to record highs ​while, simultaneously, weighing on real gross domestic product (GDP) growth. Demand for all the equipment that ‌goes ​into building US AI data centers and infrastructure is surging, but much of it is directed toward imports. This is widening the trade deficit, which, in turn, is a drag on growth, not enough to slow the economy to a halt, but enough to ensure it doesn't accelerate too fast.

Politically, it's a double-edged sword. On the one hand, the Trump ‌administration can claim it is presiding over the biggest investment boom in US history, which is powering the stock market to all-time highs. The market's resilience is all the more remarkable, given years of above-target inflation and now rising interest rates and the highest bond yields in 25 years. Yet headline economic growth is pretty soft. It's certainly not as strong as one might expect given record levels of capital expenditure (capex), corporate earnings, and stock prices, with a labor market essentially at full employment.

There's little indication ‌of this negative feedback loop breaking in the coming quarters. If anything, it is liable to tighten. TRADE DEFICIT HEADED FOR 4% OF GDP?

According to UN Trade and Development, around three-quarters of the rise in US goods imports last ‌year was in "AI-related hardware" such as "servers and high-performance computing equipment". A Federal Reserve Bank of Minneapolis paper published in August estimated that around 70% of AI-related capital spending is on imported goods. Figures last week showed that the US trade deficit widened to $105.6 billion in August, the widest in 17 months, driven by record imports as purchases from abroad rose 4.3% to an all-time high of $420.8 billion.

The trade deficit was 2.7% of GDP in the first quarter and 3% in the second, with business spending on equipment, mostly related to AI, playing a key role. The August data and strong orders that ⁠month for non-defense ​capital goods, excluding aircraft, suggest these dynamics have spilled over into ⁠the third quarter. Could the trade deficit be heading toward 4% of GDP? Dean Maki, economist at hedge fund Point72, reckons it is. “This is structural. We think these levels of trade deficits are going to continue, and probably expand over the next year.”

Maki says that the rise in capital ⁠goods imports is almost all down to growing AI-related demand for computers, semiconductors, peripherals, and telecommunications equipment. The volume of these imports helps explain why annual GDP growth in the second quarter was only just above 2%, even as business equipment spending growth accelerated more than 16%, ​the fastest pace in five years. As long as the AI spending spree continues apace, the US trade deficit will stay wide, pointing to only "moderate" real underlying growth, Maki reckons.

ASIA'S SOARING SURPLUSES Where are these imported AI-related goods ⁠coming from? Asia.

Last week, Asia's AI darlings Samsung and TSMC showed the positive flip side of the flows. Samsung, the world's largest memory chipmaker, said it expected to announce third-quarter earnings of around $80 billion, a record quarterly profit for any tech company, and TSMC, the world's largest contract chipmaker, unveiled record third-quarter revenue ⁠of $46.7 ​billion. Brad Setser, global capital flows watcher and senior fellow at the Council on Foreign Relations, notes that South Korea and Taiwan ran a combined annualized trade surplus of $800 billion in September, up from $100 billion two years ago. If this is sustained, the two countries are on course to post a combined current account surplus next year of $1 trillion.

"Crazy," Setser posted on X last week. This is also a challenge for US President Donald Trump, whose global trade wars were aimed ⁠at reducing the trade deficit and punishing the rest of the world for "ripping off" the US for decades. Record imports and a widening deficit, coupled with record trade surpluses in key trading partners abroad, including China, show these policies aren't ⁠working as intended.

They might in time, just as the AI ⁠productivity boom could spark into life at some point. But it's unlikely to be soon. For now, the AI boom is boosting Wall Street more than GDP. (The opinions expressed here are those of the author, a columnist for Reuters)

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(By Jamie McGeever Editing by Marguerita Choy)