AI Investments: Economic Lifeline or Bubble?

Published Date : 9/10/2025 

Despite economic challenges, the US economy is being bolstered by significant investments in artificial intelligence (AI). However, experts are raising concerns about the sustainability of this growth. 

Despite the economic turbulence caused by tariff and immigration policies under former US President Donald Trump, the US economy has remained relatively stable. Experts attribute this stability to the artificial intelligence (AI) industry. George Saravelos of Deutsche Bank noted in a recent client update, “AI machines—in quite a literal sense—appear to be saving the US economy right now.” He added that without tech-related spending, the US might have been on the brink of, or even in, a recession this year.

Economist and Nobel laureate Paul Krugman has echoed similar sentiments in his Substack newsletter. AI companies are pouring hundreds of billions of dollars into AI infrastructure and development, while other US companies are spending billions on AI products.

Just last month, a data center in Abilene, Texas, the flagship site of the $500 billion Stargate programme—a joint venture between Oracle, OpenAI, and Japan’s SoftBank—began operations. This program aims to advance AI infrastructure in the US. Around the same time, chipmaker Nvidia announced it would invest up to $100 billion in OpenAI and provide it with data center chips. Nvidia also became the first US company to hit a $4 trillion market value, a benchmark soon matched by Microsoft, with AI being a key driver of business demand.

Nvidia and Microsoft are not alone in their AI ambitions. Google’s parent company, Alphabet, and Meta Platforms, which owns Facebook, Instagram, and WhatsApp, have also increased their commitments to AI development and investments.

While AI enthusiasm seems to be sustaining the US economy, there are growing concerns about a potential bubble similar to the dot-com bubble of the late 1990s. Campbell Harvey, a professor of finance at Duke University, explained, “The reason people are worried about an AI bubble is because seven companies are pulling more than 400 others forward.” A look at the S&P 500 shows that seven tech companies heavily involved in AI are the primary drivers of growth.

Harvey acknowledges that it's still early days in AI adoption and growth, making it difficult to determine if the stocks of these tech companies are overvalued. Carl Frey, an associate professor of AI & Work at Oxford University, adds, “A bubble may be building, but we’re nowhere near tulip mania territory.” He refers to the massive increase in tulip prices in 17th-century Netherlands, often cited as a classic example of a bubble.

However, Frey notes that early AI adopters are beginning to have second thoughts. Large corporations that initially rushed into AI are now narrowing their projects to those that clearly save or make money, putting the rest on hold. For example, major corporations like IBM and Klarna cut thousands of customer service jobs and replaced them with AI—only to reverse course not long after, finding the technology less effective than human workers.

If major corporations that have invested heavily in AI tools decide these tools are not as useful as initially hoped, it could pose a significant problem for AI companies. They might lose customers, and their stock prices could decline as projected profits fall.

A report released by MIT in August found that 95 percent of companies that have adopted AI are not achieving significant revenue acceleration from it. Data from the US Census Bureau also shows that AI adoption by large companies has started to slow down recently. This trend suggests that people are beginning to question the utility of these AI tools, which are often used to replace human workers in jobs like customer service, software engineering, and other entry-level positions.

Cal Newport, a professor of computer science at Georgetown University, observes that many companies raced to integrate AI into their operations last year due to the hype and fear of falling behind. However, integrating generative AI into existing workflows in significantly useful ways has proven more challenging than anticipated. Newport notes that the underlying models in these AI programs are currently “too unreliable” to automate jobs effectively. He adds that the idea of rapid job displacement by AI “has simply not come true.”

A recent Stanford study found that entry-level jobs in customer service, accounting, and software development have decreased by 13 percent since 2022 due to the adoption of AI tools in large companies. While it’s not clear that AI has reached “bubble” territory yet, the risk remains. If the bubble were to burst, it could have significant negative impacts on the US economy.

Frey points out that the dot-com bubble was costly for investors but left behind technologies and infrastructure that ultimately boosted productivity. The question is whether the current AI situation will play out similarly. “Unless an AI bust topples a major lender and triggers a full-blown financial crisis, the bigger risk today is different,” Frey said. “AI hasn’t yet delivered a clear, broad-based productivity boost—precisely what our stagnating economies need.” 

Frequently Asked Questions (FAQS): 

Q: What is the Stargate programme?

A: The Stargate programme is a joint venture between Oracle, OpenAI, and Japan’s SoftBank aimed at advancing AI infrastructure in the US. It includes the establishment of a data center in Abilene, Texas.

Q: Why are experts concerned about an AI bubble?

A: Experts are concerned about an AI bubble because a few large tech companies are driving most of the growth and investment in AI. If these companies or their AI products fail to deliver on their promises, it could lead to a significant economic downturn.

Q: What are the signs of slowing AI adoption?

A: Signs of slowing AI adoption include major corporations like IBM and Klarna reversing their AI-driven job cuts, and a recent MIT report showing that 95 percent of companies adopting AI are not achieving significant revenue acceleration from it.

Q: What are the potential risks of an AI bubble bursting?

A: If the AI bubble bursts, it could lead to a significant decline in stock prices and a loss of customers for AI companies. This could have a negative impact on the US economy, especially if it triggers a broader financial crisis.

Q: What is the current state of AI in terms of productivity?

A: While AI has shown promise, it has not yet delivered a clear, broad-based productivity boost. Many companies are finding that integrating AI into their workflows is more challenging than initially thought, and the technology is not as reliable as needed for widespread job automation. 

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