Fast-embraced AI will be slow to lift productivity

The rate surpasses the 1.5% of the 1980s. But during the latter part of the 1990s, huge capital expenditure contributed to a 2.7% productivity leap, with quarterly rates that sometimes exceeded 4%. Then, slowing inflation underpinned consumption. Today, wars and supply-chain snags are eroding real incomes.

It's possible statisticians are understating the value U.S. AI giants capture from the huge spending on data centers when products designed in America are manufactured and sold overseas, as with Nvidia NVDA.O chips made in Taiwan and shipped to Europe. Annual GDP measurements could fall short by as much as two percentage points by 2028, research institute Epoch AI estimated last month.

More generally, data often struggles to reflect upgrades in quality from technology. The baffling lack of a productivity windfall from early investments in the 1980s, famously noted by Nobel laureate Robert Solow, prompted "hedonic adjustments." These mechanically boosted 1990s output and reduced inflation as dollars went further in real terms. Most of the spending surge then reflected computers getting 40% faster annually, rather than companies buying more hardware.