Half Of U.S. Growth Is Just Data Centers & AI Says Harvard Economist | Jason Furman

Key Concepts

• GDP Growth Drivers: Data centers, information processing systems, and software are significant contributors to current GDP growth.
• K-Shaped Recovery/Growth: Potential for wealth inequality due to stock market gains, with uncertainty about income and wage distribution.
• Economic Slowdown Risks: Slowdown in tech/data center capital expenditures (capex) could lead to a shallow, treatable recession, manageable by monetary or fiscal policy.
• Labor Market Dynamics: Slowing job growth, but also slower firing, indicating a slowdown in labor market churn. The Beveridge curve relationship between unemployment and job openings is discussed.
• Immigration Impact: Reduced immigration affects break-even job growth and has ambiguous effects on wages and inflation due to simultaneous impacts on demand and supply.
• US-China Relations: Recent meeting described as a "truce, not a peace treaty," with underlying tensions unresolved. Decoupling's diminishing importance for China's GDP is noted.
• Standard of Living Improvement: Focus on productivity growth (AI), basic research, education reform, and immigration as key drivers.
• Manufacturing Jobs: Decline attributed to technological improvements, not trade.
• Minimum Wage: Federal minimum wage is no longer binding for most workers; states have taken the lead.
• National Debt: High debt levels lead to higher interest rates and potential fiscal crises. Solutions include spending cuts and tax increases.
• Digital Assets: Skepticism towards Bitcoin reserves, but support for regulatory frameworks for stablecoins (Genius Act).
• Federal Reserve Policy: Debate on recent rate cuts, with inflation being the greater risk than unemployment.

Economic Growth and Data Centers

• GDP Contribution: In the first half of 2025, 92% of GDP increase was attributed to "information processing systems and software," primarily driven by data center investments. Without this, GDP growth would have been negligible (0.1%).
• Counterfactual Analysis: If data center expansion hadn't occurred, the impact would be slightly less severe than the mechanical calculation suggests due to lower imports and potentially lower interest rates stimulating real estate investment. However, consumer spending, partly fueled by the stock market (which is influenced by data centers), could mean the data center impact is even larger.
• Current Growth Breakdown: Approximately half of current GDP growth is attributed to the data center boom, with the other half from other economic activities.

Wealth and Income Inequality

• Wealth Inequality: Confirmed increase in wealth inequality over the past year due to significant stock market gains, benefiting those who own more stocks.
• Income/Wage Uncertainty: The source of increased consumer spending is unclear. It's unknown if it's high-income individuals spending from stock gains (sustainable) or low-income individuals borrowing (unsustainable). High-frequency data on individual income and spending is lacking.

Impact of Capex Slowdown in Tech Sector

• Short-Term Impact: Difficult to compensate for a slowdown in tech sector capital expenditures (capex) in the short run.
• Medium-Term Outlook: The Federal Reserve has room to cut interest rates to stimulate other sectors, particularly residential investment, which has been lagging.
• Recession Risk: A shallow, treatable recession is a potential risk, comparable to the NASDAQ bubble, not the housing bubble.
• Policy Response: Treatable by monetary policy (Fed rate cuts) or fiscal policy. Monetary policy is seen as having significant room.
• Bubble Bursting: Even if the data sector is in a bubble, its bursting might not cause a recession but would significantly slow growth and increase recession risk.
• Fiscal Policy Caution: Due to high debt levels, fiscal policy should be a last resort.

Stock Market vs. Job Openings Divergence

• "Scariest Chart": A chart showing a divergence between the stock market (S&P 500 up >70% since November 2022) and job openings (plummeted ~30%) since the launch of ChatGPT.
• AI's Role: Skepticism that AI is a significant factor in the decline of job openings.
• Beveridge Curve: The relationship between unemployment and job openings is consistent with contractionary monetary policy, which aims to raise unemployment and lower job openings. The current trend aligns with the pre-COVID Beveridge curve.
• Labor Market Churn: A slower pace of hiring and firing indicates a slowdown in labor market churn, not necessarily widespread job losses expected from AI.

Labor Market Weakening and Immigration

• Job Growth Slowdown: Pace of job creation has significantly slowed: over 200,000/month in 2023, over 100,000/month in 2024, and less than 50,000/month in the current year.
• Unemployment Rate: Increasing very gradually, not faster than in previous years, suggesting a slight demand weakening.
• Supply Collapse: The primary change over the last 2.5 years has been a "collapse in supply," attributed to a significant reduction in immigration.
• Immigration's Effect:
  • Job Growth: Lower immigration leads to a lower break-even job growth rate.
  • Wages & Inflation: The net effect on wages and inflation is ambiguous, as fewer immigrants mean less demand but also less supply.

Economic Outlook for 2026

• Atlanta Fed GDP Now Tracker: Estimating 3.9% for the next quarter (as of Oct 27).
• Residential Investment: Annualized real residential investment growth increased from 4.6% to 4.4%.
• Ferman's Estimate: Closer to 3.0% than the Atlanta Fed's 3.9%.
• Shockingly High Growth: Current growth is considered surprisingly high, exceeding the economy's steady-state growth rate, even considering tariffs.
• Sources of Growth: Potential sources include productivity gains (possibly from AI in Q3 2025) or measurement quirks. Disconnects between jobs and GDP often point to measurement issues.

US-China Trade Relations

• Recent Meeting: Described as a "truce, not a peace treaty," a welcome development but not a resolution of underlying issues.
• Concessions: China lifting bans on rare earth minerals, US lowering some tariffs, China resuming soybean purchases.
• Underlying Issues: Not resolved. The agreement largely reverts to the status quo ante.
• Importance of Dialogue: Leaders of the two largest economies should talk, which is positive.
• Vague Agreements: Many agreements were vague.
• US Objectives: Unclear if the Trump administration seeks delinkage (costly) or simply increased Chinese purchases (doesn't address structural issues).
• Ferman's Goal for US-China: Protecting cooperation in the economic sphere while strengthening national security and self-reliance, ideally on a multilateral basis.
• China's Decoupling: China's external sector's importance has diminished over 20 years as it rebalanced demand internally. Chinese exports are a rising share of global GDP but a falling share of China's GDP.
• Leverage: US leverage through tariffs is less significant to China than 20 years ago, requiring more creative pressure tactics.
• Conflict Risk: Hope that economic tensions do not escalate into military conflict, despite China not always playing by international economic rules.

Improving Standard of Living in the US

• No "Magic Bullet": No single policy guarantees dramatic improvement.
• Key Drivers:
  • Productivity Growth: Driven by AI. The government's role is to facilitate, not hinder, AI development and deployment.
  • Basic Research: High potential payoffs, though not always on a 10-15 year timescale.
  • Education Reform: Reforms in K-12 schooling, many not requiring significant funding.
  • Immigration: Considered a "superpower" for the US economy and a crucial part of growth strategy.
• Average Person's Desire: More job opportunities and higher real wages.
• Job Creation: Bringing manufacturing onshore is not seen as an effective strategy, as manufacturing job losses are primarily due to technological advancements globally. The government's role is to create a favorable economic climate.
• Wages: Need improvement, directly linked to productivity gains.

Minimum Wage

• Federal Minimum Wage: The federal minimum wage of $7.25/hour is no longer binding for most workers, as market wages are higher.
• State-Level Minimum Wage: Many states have significantly higher minimum wages (e.g., $15/hour in Massachusetts), which are binding for many workers.
• Federalist System: A shift from a federal to a federalist system for minimum wage, allowing states to set their own rates.
• Impact of Raising Minimum Wage: Academic debate exists. Modest increases may lead to small employment reductions, but not significant enough to prevent implementation. Larger increases could have non-linear, larger effects.

National Debt Situation

• Current Debt: $38 trillion.
• CBO Projections: Deficit expected to remain high or increase over the next decade.
• Economic Consequences:
  • Higher Interest Rates: Leading to less business investment and more costly mortgages.
  • Fiscal Crisis Risk: Increased, though the probability is uncertain and psychological.
• Solutions:
  1. Default: Considered a very bad solution.
  2. Lower Interest Rates: Desirable but not something the government should force.
  3. Higher Growth: Efforts to boost growth are important but unlikely to solve the debt problem alone.
  4. Cut Government Spending: Has a role to play.
  5. Raise Taxes: Also has a role to play.
• Magnitude of Adjustment: Similar to the early 1990s, suggesting it's doable.
• Political Dysfunction: The primary obstacle is the current political climate, making bipartisan deals difficult.
• Balanced Budget/Surplus: Last balanced budget/surplus was under President Clinton. Tax cuts and global wars led to deficits afterward.
• Debt-to-GDP Ratio: The goal should be to reduce the debt-to-GDP ratio, not necessarily to run a surplus or reduce debt in dollar terms. A deficit of around 3% of GDP is sustainable, compared to the current 6%.

Government Adoption of Bitcoin and Digital Assets

• Bitcoin Strategic Reserve/Meme Coins: Deeply disturbing, seen as crony capitalism, corrupt, arbitrary, with no economic upside and significant rule of law/governance downside.
• Genius Act (Stablecoins): Creating a regulatory framework for stablecoins is a good idea. The US dominates stablecoins, which is positive. While specific details of the act could be improved, it represents the necessary type of legislative and regulatory discussion.
• Treasury Secretary's View: The dollar now has an "internet native payment rail" that is fast, frictionless, and free of middlemen, which could buttress the dollar's reserve status and increase demand for US treasuries.
• Ferman's Counterpoint: Stablecoins are a "rounding error" compared to the scale of US treasuries and money market funds. Shifting from money market funds to stablecoins does not create additional demand for US debt, only a shift in holdings.

Federal Reserve Actions and Policy Evaluation

• Recent Rate Cut: Ferman would not have voted for the rate cut this past week.
• Reasons for Not Cutting:
  • Inflation is 1 point above target.
  • Unemployment rate is only 0.1 above target.
  • Financial conditions are easing dramatically.
  • Risk of fueling a stock market bubble.
  • Ambiguity about real economy weakening given strong GDP growth.
• Not a "Horrendous Mistake": While not ideal, the cut is not considered a catastrophic error.
• Powell's Communication: Pleased that Jay Powell signaled that another December cut is not a foregone conclusion.
• Balancing Act: The Fed faces a difficult balancing act between too many rate cuts (risking inflation) and too few (risking rising unemployment).
• Bigger Risk: Higher inflation is the greater risk because it is already present, whereas higher unemployment is a forecast. Basing policy on the future is difficult due to its unknowability.
• "Less Bad Answers": The Fed is navigating a situation with no perfect solutions, only less bad ones.