As ever, here is what's ahead:
- Updates on prior pieces
- My most recent Rough Notes essay
- A few things worth reading
Updates & Erasures:
I previously wrote about the perils of building renovation as a Fed chair, especially given an administration bent on finding a reason to fire you "for cause." As anyone who has renovated anything larger than a dog house knows, no one thinks what you spent on renovation makes sense, not even you. Most spouses wish they could fire someone for cause over most renovations.
In that light, this WSJ explainer of the ongoing Federal Reserve renovations is useful reading as various administration officials feign dismay at someone renovating a building that hasn't been renovated in ... ever. Shocked, I am shocked to find renovations going on in here.
On Tuesday, T***p said he was surprised to learn about the costly building renovations, given his view that Powell is a boring and unintelligent person. “I think he’s a total stiff, but the one thing I didn’t see him [as] is a guy that needed a palace to live in,” he told reporters.
Say what you will about Powell's monetary policy, either that wallpaper doesn't go¹, or Powell does, apparently.
¹ Writer Oscar Wilde's final words may or may not have been: "This wallpaper and I are fighting a duel to the death. Either it goes or I do.”.
Rough Notes:
Honey, AI Capex Ate the Economy
How extreme is AI datacenter spending? It is to the point that even Chinese President Xi Jinping is warning about it. With more than 250 datacenters under construction in his country, this week he cautioned against the spending rush, threatening to intervene:
“When it comes to projects, there are a few things — artificial intelligence, computing power and new energy vehicles. Do all provinces in the country have to develop industries in these directions?"
The U.S., however, leads the capex spending way. One analyst recently speculated (via Ed Conard) that, based on Nvidia's latest datacenter sales figures, AI capex may be ~2% of US GDP in 2025, given a standard multiplier. This would imply an AI contribution to GDP growth of 0.7% in 2025.
I wrote previously about some of the unintended consequences, in particular the emergence of off-balance sheet funding vehicles. Let's dive into its size and consequences again, however, with three thoughts in mind:
- The above impact estimates may be a lower bound.
- The redirected capital spending is coming from somewhere.
- All this spending helps explain a mystery.
1. A Lower Bound?
Here are some basic numbers to get things started:
- US 2025 GDP: $25 trillion (Source: Consensus forecasts and extrapolations from BEA data)
- Nvidia sales to datacenters (Q1 FY2026): $39.1B (Annualized: $156.4B)
- % of Nvidia datacenter sales that is AI related: ~99% (Primarily H100/GH200 sales to hyperscalers and enterprises)
- Nvidia share of datacenter capex: 25-35%
- Economic multiplier: 1.5x-2.0x
- Implied total datacenter capex: ~$520B (156.4b/0.3)
So, to get the total GDP impact, including multipliers, do the simple math:
These are very large numbers given that before 2022 AI capex was likely less than 0.1% of GDP. It has, in three years, grown by at least 10x from there, and perhaps more than that.