With Q3 preliminary GDP data dropping Wednesday, it's worth revisiting what actually happened in the first half of 2025. The headline numbers looked okay—1.6% annualized GDP for H1. But strip out AI infrastructure spending, and the economy was basically flat.
The first half was a tale of two quarters. Q1 contracted as imports surged and government spending slowed. Q2 rebounded hard at 3.8%, rescuing the half-year average. Throughout both quarters, one thing stayed consistent: investment—specifically, AI investment—was the only major component driving growth.
Harvard economist Jason Furman calculated that excluding data center and AI infrastructure investment, H1 2025 GDP growth was just 0.1% annualized. Not 1.6%. Not even 1%. Essentially zero.
Tech giants are burning through cash at an unprecedented rate. Microsoft, Amazon, Google, Meta, and Nvidia are projected to spend $342 billion on capex in 2025—a 62% jump from prior years. Data center construction reached a $40 billion annual rate in June, up 30% from the same period last year.
The money's real. The question is what happens when it stops.
"For the first time ever, AI data center spending contributed more to GDP growth than U.S. consumer spending. Think about that. Consumer spending is usually 70% of the economy. Now it's being outpaced by server farms."
Everything Else Is Stuck
Take AI out of the picture and you're left with an economy that's barely moving:
Metric | Period | Value | Notes |
|---|---|---|---|
Residential Investment (real, annualized) | Q2 2025 | –5.1% | Reflects significant contraction |
Consumer Spending (real PCE, annualized) | Q2 2025 | +2.5% | Broad rebound after Q1 slowdown |
ISM Manufacturing PMI | June 2025 | 49 | Below 50. Indicates manufacturing contraction |
The Part Nobody Talks About
AI investment didn’t just create growth—it redirected capital from other sectors.
Furman made the following statement:
"The massive pull of capital into AI drove up interest rates and energy prices. It absorbed workers and materials that would've gone to housing, manufacturing, and other sectors."
If that capital had stayed spread out, it might've generated roughly half the headline gains AI is getting credit for, but across the whole economy instead of one corner of it. Deutsche Bank found that business investment outside AI has been flat since 2019. Bank of America’s economist said it’s the only source of investment right now.
The AI Cliff Nobody's Pricing In
Here's the scary part: hyperscaler capex is running near $400 billion annually. That's discretionary spending funded with cash, not debt. Meaning it can get cut tomorrow if CEOs change their minds.
With the rest of the economy growing at 0.1%, any slowdown in AI spending would likely push GDP into contraction. Barclays estimates that if AI investment growth slows, it removes 0.5 percentage points from GDP. If it stops? That's a full point gone.
BCA Research strategist Peter Berezin put it plainly:
"It's certainly plausible that the economy would already be in a recession without the AI boom."
Turner Construction said data center projects now make up 35% of their U.S. backlog, up from 13% five years ago. Lead times for generators and electrical equipment are stretching, and grid capacity is becoming a bottleneck.
Past Examples
This exact pattern has played out before, and it never ends well:
1990s telecom boom: Massive capital poured into fiber optics. Result: brutal overcapacity, investment collapse, recession, mass layoffs. The infrastructure eventually proved useful, but the transition was painful.
Dot-com bubble: Huge investment into internet companies created a growth illusion with no real productivity underneath. When valuations corrected, spending collapsed and dragged the economy down with it.
1990s IT spending: Companies dumped money into computers and software with zero immediate productivity gains. Years later, after reorganizing workflows, productivity finally showed up. It took 15+ years to recover from the historic tech drawdown.
History is repeating itself now. We're measuring dollars spent building infrastructure, not actual productivity improvements. GDP counts the spending—not whether it's working yet. The economic payoff is still years away, maybe longer.
Two Ways This Ends
Best case: Capex stays strong through 2026, AI tools deliver real productivity gains, and growth broadens.
Worst case: AI spending slows, bottlenecks tighten, investors rethink returns, and the economy falls into recession quickly.
Barclays estimates a 20-30% market drop could cut GDP by 1 to 1.5 percentage points over a year. Combine that with an AI capex slowdown, and you're looking at a serious downturn.
What Investors Need to Watch
Critical slowdown signals to watch
The Uncomfortable Reality
Apollo's chief economist Torsten Sløk admitted something rare for economists:
"The consensus has been wrong since January. We've said the economy would slow for nine consecutive months. It just hasn't happened … We need to look ourselves in the mirror."
The economy looks strong on paper. But it's hollow. Strip out AI and you're left with housing down, manufacturing flat, consumer spending weak, traditional investment stalled.
Even Jeff Bezos called it an "industrial bubble", though he insists it'll be worth it eventually. Maybe. But right now, sustainable growth and useful infrastructure someday are two different things.
The Bottom Line
H1 2025 growth is overwhelmingly powered by one sector: AI infrastructure. Strip out hyperscaler capex and real GDP is essentially flat. The rest of the economy—consumption, housing, manufacturing, and traditional investment—is barely moving. That leaves growth dependent on a single discretionary spending cycle that can reverse quickly.
If AI capex slows, the economy loses its only engine. The soft-landing narrative looks far less stable once you recognize how narrow the foundation truly is.
Wednesday's Q3 GDP release will show whether this pattern continues or if growth finally broadened. Until then, remember: the economy that looks strong on paper is being propped up almost entirely by one sector's spending binge.
Important disclosures: This newsletter is provided for informational purposes only and does not constitute investment advice. All investments involve risk, including possible loss of principal. Please consult with your financial advisor before making investment decisions.
