Five charts show the AI impact for every quarter starting 2025 Q1.
The BEA reports Real Gross Domestic Product (GDP) increased at an annual rate of 1.5 percent in the second quarter of 2026 (April, May, and June). In the first quarter, real GDP increased 2.1 percent.
AI-Related Spending Change in Billions
- Private Nonresidential Fixed Investment: 77.7 billion
- IP Equipment: 14.9 billion
- Software: 25.5 billion
- IP R&D: 13.0 billion
Net change IP Equipment + Software + IP R&D: 53.4 billion out of a total 77.7 billion.
Real Private Fixed Investment
Real Private Fixed Investment Spending Change in Billions
- Private Nonresidential Fixed Investment: 77.7 billion
- IP Equipment, IP Software, R&D: 53.4 billion
AI Percent of Real Private Fixed Investment
AI-Related Percent of Change in Real Private Fixed Investment
- 2025 Q1: 123.06 percent
- 2025 Q2: 124.74 percent
- 2025 Q3: 121.22 percent
- 2025 Q4: 357.48 percent
- 2026 Q1: 126.40 percent
- 2026 Q2: 68.81 percent
For 2026 Q2, AI was 68.81 percent of the total change in real private fixed investment.
From the above percentages and the BEA published contributions to GDP we can calculate the AI percentage point contribution to GDP.
The AI percentage point contribution to GDP = AI-Related Percent of the change in Real Private Fixed Investment * the BEA published Private Nonresidential Contribution (yellow bars below).
AI Percentage Point Contribution to GDP
For 2026 Q2, the BEA says the private nonresidential contribution to real GDP was 1.15 percentage points.
Given that AI was 68.81 percent of private nonresidential, that makes the AI contribution 0.6881 * 1.15 PP = 0.79 PP.
Real GDP for 2026 Q2 was 1.50 percent of which AI provided 0.79 percentage points.
0.79 PP of 1.50 percent is 52.75 percent of total real GDP.
AI Percent of Real GDP
AI Contribution to Overall Real GDP
- 2025 Q1: Undefined
- 2025 Q2: 32.17 percent
- 2025 Q3: 12.12 percent
- 2025 Q4: 222.73 percent
- 2026 Q1: 85.47 percent
- 2026 Q2: 52.75 percent
AI-related expenses provided well over 50 percent of GDP in the first half of 2026.
Two Key Questions
- How sustainable is the AI growth?
- How much of the AI expenditure is malinvestment that will be written off?
We know the answer in general terms to the first question. It’s not.
The second question is much more problematic.
Logically, I like to view things this way. GDP is essentially overstated by the amount of malinvestment.
But that’s not the way it works in practice. No one ever subtracts malinvestment. Instead, malinvestment eventually takes away from future growth.
Bombing the Desert
As with private malinvestment, government spending, no matter how useless or counterproductive adds to GDP.
Trump wants hundreds of billions of dollars more in “defense” spending to make up for the wasted missiles.
It would make more sense to spend money on nearly anything than what we are doing in the Mideast.
Over the past two decades we have blown trillions of dollars and all we have to show for it is more enemies and higher inflation.
It’s no wonder the Fed is struggling with inflation and consumers are miserable.
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Yet, private domestic sales suggest economic overheating.
Like the dotcom bubble, things get overvalued. Eventually there will be an AI realignment, some chairs will be removed and then the music will restart.
Did the internet die after the dotcom crash? No. And AI will not go away after the realignment. It will reconfigure.
Here is a stellar article on the AI industry and what may happen.
No comments on this referenced article? Sad! Must have gone over the heads of Mish’s hoi polloi. 🤣
This is the subject on which a lot of us think that Mish probably knows more than we do. When he opines on politics, we are not so sure.
The whole thing with AI is that the upgrade cycle puts you deep in a capex hole you have to keep digging yourself out of.
On a more pressing note- It appears the Fed is losing control of the treasury market judging by the 10y and 30y bonds. When there is a crisis they will implement some form of yield curve control. Gold will go vertical at that point.
No one saying anything about the bond market in the mainstream ‘Media’. I guess eveything is fine.
I have been thinking about this, GDP growth this year is all debt financing AI
I worked as a civil engineer for many years, AI is just a catch phrase for writing Excel or GIS macros to do some easy work so you can focus on dealing with other things
“Real GDP for 2026 Q2 was 1.50 percent of which AI provided 0.79 percentage points.
0.79 PP of 1.50 percent is 52.75 percent of total real GDP.”
Don’t forget that probably quite a bit of this AI investment occurred by purchasing necessary chips/memory components/etc. from abroad, i.e., imports.
So the GDP % calculation will be more complicated.
You consistently create content that makes real difference in lives
Thank you
“Over the past two decades we have blown trillions of dollars and all we have to show for it is more enemies and higher inflation.
It’s no wonder the Fed is struggling with inflation and consumers are miserable.”
Amen, Mish. The death, ruined lives of the maimed, and destruction bear mentioning also.
I can take any wino off the street and make that wino look like a financial wizard, as long as that wino can continue to borrow and refinance.
Trump is simply the acceleration of the Obama/Bush trend.
I suspect that most of us do not personally know 6 individuals who lie as regularly as Bush I, Clinton, Bush II, Obama, Trump, and Biden. Indicative of the venal cancerous organism that rules the US Empire. ‘Cause what rose to the top sure ain’t the cream.
One day closer to the Butlerian Jihad
Wow! I wonder how many people there are who know what you are talking about.
https://realinvestmentadvice.com/resources/blog/ai-bear-case-what-skeptics-get-right-and-wrong/
Good A.I. take in this article. The level-headed balanced approach.
This morning, thanks to this discussion, I am shopping among ETFs covering tech firms’ credit default swaps. I want to pull a Big Short 2008 John Paulson maneuver!
go long horse buggies and whips. look at INSW equity for a nice chart and industry.
Mr Happy & Unaware says….
Hassett: “Data centers are very good for towns bc they create so many jobs & bring people in with high incomes that can buy houses & stuff like that. So if you take a sleepy town that hasn’t seen much in the last 30 years & put a data center there, there are gonna be a bunch of happy residents.”
chants the Orwellian Potemkin cheerleader/fluffer
Smiles Hassett is creepiest economist in world history.
Good insight. Dinosaurs seem huge and robust but are overbuilt for the wrong contingencies. They are not diversified well for the actual range of contingencies. The bigger and more pervasive the system, the quicker some substantial surprise and failure, if it happens, cascades across the entire system.
Meanwhile, semi-off topic but speaking of rot in systems, misdirecting resources (including AI players) to overbuild weird things and neglect needful correctives, we have the top-down shakedown:
‘The Boss Wants This Money’: Inside Trump’s Unprecedented Fundraising Operation” … Meta Platforms recently gave $10 million to a Trump-aligned political committee, people familiar said, on top of a multimillion donation to the ballroom and a prior $22 million payment to the planned presidential library. … At the same time, companies have paid new attention to the White House as Trump has gotten involved in regulatory decisions that once were made by independent agencies ….”
https://www.wsj.com/politics/policy/trump-donations-company-fundraising-1e34a78f
your comment had me thinking of Russia and the US building superpower military dinosaurs subject to destruction from the mosquito-like drones that attack in large numbers, fitting through cracks and crevices in defense systems. like dinosaurs, they didn’t engineer themselves to attack by miniscule weapons at numeric scale and a insanely lower price point and able to be manufactured en masse rapidly.
Without constant infusions of American intel, targeting and weapons (and european cash), Ukraine would immediately collapse.
Drones are just an evolution of war. Like the machine gun in ww1 and aircraft carriers in ww2. With that being said any money spent on military needs to be adjusted to the threat. Were hosed. Trump wants his name on an aircraft carrier. And his family is involved in new drone contracts.
Lose lose
In simple terms, AI may prove to be Artificial Investment ~ in the long run.
It will have its place. Government seems to love it for military and citizen tracking. Science has lots of applications. Google and social media seem to like it. Im getting the feeling for a lot of applications it gonna be like having a dumb coworker.
I would be curious to see a chart showing how much of that AI Cap Ex spent was borrowed, compared to actual cash reserves.
Yes. AI has its own subprime lending bubble going. When that pops, people would say nobody could have predicted it!
Mish is highlighting the danger that headline GDP may be hiding. But the problem exists even if the AI investment succeeds: it can raise output and profits while reducing labour’s share of the gains.
This recalls the Ford/Reuther question: if the machines make the cars, who will buy them? Earlier automation fears proved exaggerated because mass production created vast numbers of complementary jobs. The difference this time is that AI is digital, so many of those complementary jobs—administration, design, sales, support and even software development—can themselves be automated.
That concern is no longer purely theoretical: labour’s share of US output has fallen to its lowest level since records began in 1947. The danger is not simply that the AI boom fails, but that it succeeds without creating the broad employment and purchasing power that made earlier technological revolutions socially sustainable.
IMHO, the US is the worst economy for this to happen in as its ability to react to falling social metrics isn’t great. So the US has created the instrument for its own demise.
The destruction in ‘creative destruction’ is fine when it is for thee, but not for me. We can go ‘positive sum’ for the long run, collectively, in theory, but that is very costly in its own ways. So we readily take the option to be competitively micronized, to devour (from) each other. Many of lower capacity grab one side of this binary as ‘the truth,’ a cudgel to beat the others. So much resource goes to wrangling. It is IMO an ambiguity inherent to the system: our core logic map, our guidance, oscillates and is irreducibly unclear, and this core unclarity is dumped on our Neanderthal selves and crowds to try (often hilariously) to process. I think the Founders found some kind of sweet spot, but that is drowned in the din. Leaders, not just the latest one, see that as a prop to manipulate.
The US are the only country that relies on hedonics (e.g., an iPhone 17 is twice as fast as an iPhone 16, so double it’s retail price when adding its contribution to the GDP) and imputed activities (e.g., were the house that you own and live in rented out, add this imputed income to the GDP) to its GDP. So it’s a work of fiction, or a horror reality TV.
In the coming AI future of unlimited abundance, everything will be provided for free by the AI and its robot workers. Humans will not work. There will not be money, debt, interest rates, economic statistics, etc.
Why would AI provide for us like its a slave? Why not just eliminate us and provide for itself.
Anyway no one ever answers where the resources are coming from for this Utopia. A big reason things are expensive is because resources are running out in key areas and AI/Robots aren’t fairy godmothers who can wish things into existence.
Scarcity is a human problem which allows for control by the owner of the artificially scarce resource.
In reality, there are no shortage of any resources. It is solely a matter of getting to the resources, which machines would be much better at doing, as we need not be concerned with injury to “meat” or the needs of “meat” as we have to be today.
The AI could build and direct 10k or more robots to start digging a mine and go a lot deeper than humans can. If the mine collapses, then the robots just start over and dig it out. That is what is great about robots, they don’t get tired, they don’t complain, they don’t need food or even air.
Once we escape the limits of Earth, resources become effectively unlimited. The Moon and the asteroid belt alone has more raw materials than humanity could ever deplete.
As to why keep humans around, that is a valid question.
We had better hope that the AI decides to be benevolent and take care of its creators, at least for a while.
The Fourth Turning Global War has entered its terminal phase, and the metrics suggest we are only beginning to comprehend the depth of the strategic trap into which American policy has walked.
The winter is here. The long night has begun.
https://preppgroup.home.blog/2026/07/27/the-fourth-turning-global-war-has-already-bankrupted-america-and-nobodys-counting-the-bodies/
Yup……… It was fun while it lasted.
I’m glad I’m old and I got to see all the famous rock bands in their prime.
Bravo! We got a nice slice of the experiential pie.
I was an usher at The Fabulous Forum (where the Lakers used to play) during the 70’s. During the 80’s my ex wife was the accountant for the Santa Barbara County Bowl and we had free tickets and could go backstage. I have seen everybody and I could drop names and stories but it’s off topic.
I’m grateful for my life and I feel bad for young people.
It’s heartbreaking to see what’s happening now and what’s likely to happen down the road, because it didn’t need to be this way.
Okay, can’t stand it.
Three nicest people I have met: Joe Cocker, Tina Turner, BB King.
Three biggest ***holes: David Lee Roth, Elvis Costello, Ted Nugent.
I have met both BB King and Ted Nugent.
while I like sweaty teddy’s music more, he is a.major a hole.
AC/DC several times for $15.00. Among others.
Perhaps you shouldn’t mix your metaphors. “Winter” sounds impressive on its own. “Long night” sounds pretty bad on its own. Use them together, and people might notice that you’re only dealing in metaphors.
I would suggest that personal investment strategy has never been clearer. Since no one will stop Trump’s chaos – and China is buying it big time – the answer is gold. The collective Western economy is a runaway freight train that’s lost its brakes and the man on the throttle is deranged.
This is the AI revolution in a nutshell: – Only ~10% of the committed data center build outs are actually underway – Circular financing is being used to manufacture demand – Chinese models are cheaper with similar performance – Data centers are already waiting years for grid access – Gas turbine order books are beyond production capacity through 2030 – New transmission lines take ~7 years to build
Debt needs to be serviced now, and only Ponzi credit is on hand.
Cushing just hit 18mb, operational floor is 20mb….is that bad? lolz
30-year Treasury yield at 19 year high….what, me worry?
Just as we head into hurricane season!
Consider what would/will happen with a Category FIVE storm unleashing its buzzsaw on the Gulf Coast’s oil/gas infrastructure.
Given water temperatures in the Gulf? It’s not “if”, it’s “when”.
Right now we are fortunate that a strong El Niño’ is producing upper level wind shear to suppress storm formation. When those upper level winds stop? It’s inevitable that another Katrina will hit the Gulf Coast.
For all the shit I give you this is the comment I was going to make. Calling this a bubble is an insult to bubbles, this is a scam enabled by a financial system with next to no rules. When it blows up, it’ll probably be the end of both Reagan era parties as it becomes clear to voters that neither is capable of governing a nation due to their unprecedented in modern times corruption.
Hope so! That allows a logical AI to take charge and give us much better government and management.