Big Tech’s $670 billion binge

If you paid any attention to tech earnings this week, you probably noticed that Big Tech’s master business plan seems to consist entirely of firing a cash cannon at anything involving the word “datacenter.”

Overall, Microsoft, Meta, Alphabet and Amazon are expected to spend over $670 billion in capex this year alone—up from $410 billion last year—and maybe even as much as $725 billion. Here’s each company’s spending plans for the year ahead:

• Meta increased its capex projection to between $125 billion and $145 billion, up from its prior estimate of between $115 billion and $135 billion.
• Microsoft told investors its capex spending will be roughly $190 billion. Prior analyst estimates were around $154.6 billion.
• Alphabet’s new capex is between $180 billion and $190 billion, up from its previous forecast of between $175 billion and $185 billion.
• Amazon told investors it’s expecting its own capex to land at around $200 billion, roughly in line with prior estimates.

Putting the Gemini in GDP

Big Tech’s data center habit has become so expensive, it’s actually meaningfully accelerating the economy, at least for now.

The Bureau of Economic Analysts revealed that US GDP grew at an annualized rate of 2% in Q1, up nicely from Q4’s measly 0.5% growth. Business spending (consisting mostly of AI infrastructure) accounted for 1.5 percentage points of growth, while consumer spending fell from 1.9% in Q4 to 1.6% in Q1, with Americans feeling the pressure of rising inflation.

Big Tech’s spending on chips and data centers is an electric jolt for the US economy, which has been facing headwinds from the Iran war and a slowing labor market. The spending spree is creating tangible GDP growth, because it hikes up demand for construction infrastructure, energy, and chips.

But the problem is that these checks aren’t generating actual, tangible results from AI just yet. Silicon Valley’s logic is that AI will eventually become such a transformative force in society that all the investment will be well worth it. The flip side, however, is that all of this building could be a waste if the AI bubble bursts, bringing down not only the stock market, but the US economy as a whole.

The cherry on top: In the meantime, the spending stokes inflation, too. “While AI investment promises to reinforce organic productivity growth in the coming years, its near-term impact through increased capex, infrastructure buildout, and energy demand is likely to add to inflationary pressures,” explained EY-Parthenon Chief Economist Gregory Daco in a note today.

If all of this info has you feeling like Charlie trying to find Pepe Silvia, just think how the FOMC must feel. On the bright side, at least incoming Fed Chair Kevin Warsh will have plenty to do on his first day of work.—LB