The Impact of AI Spending on Job Markets and Stocks

When does $360 billion buy you fewer jobs? When it is spent on artificial intelligence. The world's largest tech companies, based in the U.S., plan to invest this massive amount in 2024 alone to build data centers for AI technologies. By the end of the decade, planned investment could soar to around $7 trillion, according to a McKinsey study.

Current Job Market Effects

Despite these staggering sums, the investment is not having a positive impact on the job market. In fact, AI development is likely to keep a lid on hiring over the mid and long term. Data from the Bureau of Labor Statistics shows the domestic economy has lost approximately 78,000 manufacturing jobs this year, with heavy construction and civil engineering—key sectors for building data centers—adding only 8,000 jobs, including a net loss in August.

In Virginia, home to the world's largest collection of data centers with about 330 planned or built, construction job gains have dropped by around 10% compared to last year. This poor return is evident from the estimated $69 billion spent in the second quarter by tech giants like Amazon, Microsoft, Alphabet, and Meta Platforms, which economist Paul Kedrosky equates to an annualized pace of $276 billion. He estimates AI capex accounted for just under half of second-quarter GDP growth.

Why So Few Jobs?

Peter Berezin, chief global strategist at BCA Research, explains that most of this capex goes toward Nvidia chips and other tech equipment, much of which isn't manufactured in the U.S. Bryant VanCronkite, senior portfolio manager at Allspring Global Investments, suggests that immigration policy changes might be holding back expected job growth.

AI's Broader Impact on Employment

AI isn't just failing to create jobs; it's also slowing hiring and accelerating layoffs in various sectors. Challenger Gray & Christmas reported that AI was linked to around 31,000 job losses this year. However, Rebecca Patterson, a senior fellow at the Council on Foreign Relations, notes there's little current evidence blaming AI for the cooling job market, a view echoed by a recent New York Fed survey. Still, she warns that AI could start displacing more jobs soon, raising questions about the extent of its negative effects.

Implications for Investors

For investors, the concern is that an AI spending boom negative for overall employment might drive stocks higher regardless of the real economy's health, potentially leading to short-term gains but long-term pain. The top 10 U.S. tech stocks make up about 41% of the S&P 500's market value, fueling its 11% rally this year, even as economic growth slows and the job market weakens. This raises doubts about whether AI's promised productivity gains can offset having fewer consumers to sell to, as efficiency boosts earnings but revenue is key.