AI Industrial Revival

Jose Torres, Senior Economist at Interactive Brokers, joins Mary MacNamara to explore how AI infrastructure is reshaping GDP, energy demand, and the future of U.S. industrialization.

Summary – Cents of Security Podcasts Ep. 117

Mary MacNamara

Welcome back to Cents of Security Podcast. I’m Mary MacNamara, and today we’re going to be interviewing Jose Torres of Interactive Brokers. He’s our Senior Economist and welcome, Jose.

Jose Torres

Hi, Mary. Hello everyone. Great to be here.

Mary MacNamara

Good, good. So, the first question is, we’re going to be talking about data centers today. Is how much is AI infrastructure reshaping GDP and possibly re industrializing the US?

Okay, Jose, so the first question is, how much is AI infrastructure reshaping GDP and possibly re industrializing the US?

Jose Torres

Well, Mary, great question. A lot of moving parts. We’re seeing that in the equity market, for example, ai, artificial intelligence has been a huge driver of the tech fueled bull market that started in 2023 and has extended here into late 2025. And the expectation is that earnings are going to continue growing in the next few years, and that there’s going to. Be continued capital appreciation in the equity market overall.

And AI has really been dominating the conversation as a theme, as well as in the Magnificent seven which are, largest firms in the market. And they’ve been committing a lot of capital expenditures, heavy dollars into artificial intelligence, developing the technology, developing the manufacturing facilities, buying the semiconductor chips from producers like Nvidia. And part of the Trump administration’s Onshoring initiatives is to boost domestic manufacturing.

So, AI and Boost Onshoring, American Manufacturing, those two things go hand in hand because. AI is that theme that all these manufacturers want to get in front of and want to have be heavily involved with. So, we’re seeing huge spending, roughly $400 billion in CapEx this year. That’s expected to grow up to 500 or 600 billion next year in 2026. When you listen to the company conference calls, you hear that artificial intelligence continues to be a. It continues to be the main motivator of a prosperous outlook. Also, we’re seeing that manufacturing as a sector has become increasingly automated and less labor intensive. So artificial intelligence is also expected to bring a lot of gains there.

Mary MacNamara

So, the Fed recently noted AI infrastructure alone may add 0.5 to 0.7 percentage points to GDP in 2025, do you view this as sustainable long-term productivity growth or a temporary CapEx boom?

Jose Torres

No, I think it’s going to be sustainable because labor is essentially going to be repurposed and you’re going to start to need people for different things and. AI is going to take o over a lot of routine tasks. Alot of, some of the easier, mundane, 1, 2, 3, a, b, c kind of tasks that, workers are doing now.

So, I think it’s going to be a productivity juicer for the years to come. It’s going to help firms ideally limit their costs and, that’s where the big question comes in, because AI is expensive. Labor, of course labor is also an expense, but AI is an expense too, so you’re going to be seeing that dominate as a theme going forward. We see some companies like those in the Magnificent Seven, the big tech firms in the US. They talk so positively about AI and automation and how it’s limiting expenses and how they don’t need as many employees. But then on the other hand, you hear some companies say that labor is actually cheap and we’d rather go with labor than with AI.

Like in McDonald’s case, McDonald’s started to really pull back on a lot of their automation efforts and stuff, and bringing more people into the actual restaurants. So, it’s going to be, a shift. Retail too. Remember retail, you had a lot of the self-checkouts, a lot of the more automated aspects, but then shoplifting became an increasing problem.

So, then you started staffing up again. So, you’re going to be having a lot of those dynamics where, what do we really do? We want the people; do we want the automation? It’s all going to depend on the sector, the space, the style of priorities, et cetera.

Mary MacNamara

Yeah, they’re going to test it out, right? See what works. Right now, it seems they’re like, no, we don’t want to hire anybody. In fact, we want to let people go, and this is where we are right now, but then they’re going to see what happens. What about all those like decisions that are made, the soft decisions that AI is not doing right.

Or the soft things of dealing with a team of people. It’s not AI that can help out with, when you have one team member bullying, another team member, and a manager has to come in and help out. So, economists are describing this as a form of digital industrialization. Is this comparable to past US investment booms like the railroads or interstate highways or more speculative in nature?

Jose Torres

I really have to say that it’s more speculative in nature right now. Most AI endeavors are capital expenditures. They’re not necessarily delivering much to the bottom line. Sometimes firms are becoming confused on the benefits. For example, Apple, they’re having trouble. Investors have been, at times, frustrated with the company’s ability to use AI and bring it onto the phones in a way that is actually conducive to the consumer.

Microsoft also has had some issues and there’s been conflicting reports, but for the most part right now, AI is a risk. It’s a CapEx that may not pan out in the medium to long term. Right now, it’s a risk. It’s a risk that the larger, best capitalized companies can take. It’s perhaps not a risk that Mom and Pop shops can take regular local businesses that have, 5 employees, 50 employees that sort of thing. We have to wait and see to see how useful, how impactful and how profitable it’s going to be in the end.

Mary MacNamara

Yeah, that makes sense. So, data centers are capital intensive projects. And they’ve been in the news a lot lately. And so, with rates elevated, how vulnerable is this build out to tighter financial conditions, and could that trigger a slowdown?

Jose Torres

I don’t think it’s vulnerable to tighter financial conditions at this juncture. Because most of the investments, they are speculative in nature, and those investments are being made by the companies that have the most cash. So, they don’t necessarily need financing to embark on those projects. I didn’t answer part of your last question that I’d like to answer.

Mary MacNamara

Sure.

Jose Torres

So when you talked about the railroads and you talked about the industrial revolution and how that really changed American life and really life around the world. Because that’s all over the place now. And it’s definitely changing from a cost perspective. And for years we thought that there was a potential that we had. We were at peak fossil fuel usage, peak fossil fuel demand that we can now start relying less on fossil fuels and start relying more on alternative, more cleaner, environmentally friendly energy sources. But here comes artificial intelligence, Mary, and you need more power than you can believe.

Mary MacNamara

Oh my gosh, yes.

Jose Torres

So in that regard, the same way the industrial revolution started, correlated. I don’t want to our next climate expert, he is at Interactive Brokers. His name is Patrick Brown, not Jose Torres. But one thing I do know is that from the industrial revolution, partially because I read his stuff, one of the things with that correlated with the industrial revolution are higher temperatures.

So, some folks, I’m sure they’re going to say more industry, higher temperatures. So, with AI, and we don’t have at this juncture enough alternative, environmentally friendly energy sources to power this kind of trend. And those data centers that you talk about that take up so much power and need so much electricity in that regard. It is like the railroads, like the industrial revolution, a total game changer in terms of energy usage at a time when, the world has been trying, on and off. Trying to go green. Some years depending on, who’s in charge and some of the major economies develop major developed Western economies.

That is, because that’s another important dynamic. We don’t want to get too distracted by, in this particular conversation. But climate change and those green initiatives have been dominated by the West. Now, the main polluters and some of the biggest economies in the world like China, like Russia, those are some of the biggest polluters, they don’t necessarily care about going green or about being climate friendly.

At least they haven’t shown that yet. So now with this AI trend and now with so much reliance on it, because now the capital markets are thriving on the AI theme, people’s pocketbooks, their 401k accounts, their brokerage accounts, right? Depend essentially on the AI because if AI doesn’t pan out, then you could argue that investment gains from here are going to be limited.

So now with all this dependence on AI, there’s going to be interesting dynamics in the near future in terms of whether a lot of these projects pan out and what’s going to be the implications on energy. Already we’re seeing that the AI is taking up, is really clogging up a lot of the capacity in the electrical grid.

Most states around the country have seen electricity costs rise significantly in the last 12 months. We saw CPI today on September 11th. Electricity actually was a little bit softer, but this year, from January to now, I mean it’s just been, electricity has been significantly more expensive, and AI is a main driver of that.

Mary MacNamara

We won’t even touch upon water. I’ve heard these data centers need a lot of water too. So, it’s like that maybe will be another discussion. You’ll just have to keep talking to Patrick Brown a little bit more and get his insights. So, looking at the parallels with the dot com and housing booms, what signals would you want to watch for to distinguish a durable secular growth story from a speculative bubble, same type of thing.  What are some things that you think will be bubbling up that’ll be okay, here’s a red flag.

Jose Torres

Yeah. We don’t want to temper market enthusiasm much. But back then, Cisco was the largest company in the market. And then it then dot com bubble that is, and it suffered greatly shortly after it was a speculator frenzy. Nvidia right now is the most expensive company in the market with the market cap around 4 trillion or so. If for whatever reason, they sell hardware, they sell chips, artificial intelligence technology, if for whatever reason, 3, 4, 5, 6 competitors can start making chips at that caliber or better, then all of a sudden the dominance that they have, their dominance is spread out and now prices have to come down and artificial intelligence becomes more of a cheaper commodity rather than a scarce tool or a scare scarce concept.

If it’s not profitable for most of the end users because right now we’re in investment stage. We’re not in, how much is AI delivering to the bottom-line stage? But if we get to that stage and it’s not delivering much to the bottom line, then all of a sudden, we could be in somewhat of a dot com bubble kind of situation. I don’t think the losses will be that severe, but I think that, an S&P 500 correction of 20 to 25%. That’s what would probably occur. If we had that kind of negativity associated with AI. Of course that would translate to larger losses in Nasdaq, somewhere between 30 and 50%.

Mary MacNamara

And then we’re going to put our money in the mattresses again.

Jose Torres

And then buy more when the market goes…

Mary MacNamara

And then buy more and oh my gosh. So, you brought up Nvidia or whomever, it could be some other player that has some sort of a dominance.

And the whole argument is what makes capitalism great is to have competition, right? But then you get this like weird dichotomy where, oh wait, the S&P is all in on Nvidia. If we get more competition, which could be good for technology because then more minds are optimizing, coming up with something we don’t even know about. But then again, oh, we’re going to take a hit in our 401ks. So, it’s like you want Nvidia to do well if you’re invested. And at the same time, you do want to see competition because competition is healthy, right? At least in what we’ve been told in the capitalist system.

Jose Torres

One thing that’s also been characterized with semiconductors, and it doesn’t mean that it has to happen this time, but semiconductors, if you pull a chart of Nvidia over, since inception or a chart of AMD Advanced Micro devices or a chart of Micron Technology, MU some of those semiconductor names. These are boom and bust cycles historically. Doesn’t mean that this time it can’t be sustainable, right? This time could be different but historically, hardware, semiconductors, they tend to beat, boom and bust. So, we hope that for the, for equity markets and for, global productivity and for economic growth, we hope that this trend is sustainable and that the semiconductors really drive profitability, enhancements, and productivity gains across the entire economy and the equity market.

Mary MacNamara

Yeah, when you look at robotics, right? You look at the big manufacturing, car companies, they’re all using these intense robotics, which also need chips, right? So, it’s the chip thing or innovation like that.  It seems like it’s going to be here to stay, especially with this big thing about the fact we want plants, manufacturing plants and those require chips,

Jose Torres

And Robo Taxis too.

Mary MacNamara

So with some states seeing electricity bills climb, as all those data centers are ramping up, how should policy makers balance each expansion with consumer protection? Is that even possible in this dynamic environment that we’re in right now?

Jose Torres

Probably not. So much is driven by the price of natural gas and natural market forces that there’s really not much policymakers can do, and for that reason, I think that folks are just going to have to unfortunately deal with greater electricity costs, at least in the short run until maybe more natural gas supplies or the electricity grid is widened out. The AI leaders, they have so much influence, politically at the federal level, electricity is more of a local level dynamic. Our municipality’s really, going to take on big tech and telling them to stop clogging the electricity grid? Probably not. So, for that reason, I don’t think policymakers are really going to do much.

I think if AI is going to use the electricity, then AI is the future, and so be it. I think that’s going to be the dynamic.

Mary MacNamara

I wouldn’t be surprised if some of these, big tech companies start investing in their own nuclear reactor or doing something like that. But anyway, who knows more to come on that, right?

Jose Torres

Yeah hopefully. That’d be great, Mary. That’d be great if we could get a lot of these alternative energy sources to contribute meaningfully, more meaningfully, rather to the to the energy conversation. And we can rely less on fossil fuels, but it just doesn’t look like that, it looks like fossil fuel demand is growing from here. A lot of the world has not developed. It’s emerging. And fossil fuels are cheap sources of energy. And especially now with AI using a lot more energy now, the fossil fuel. That’s the thing. AI using more energy opens up the door for more fossil fuels,

Mary MacNamara

What, can we leave on a happy note? It’s fall, right? So, where you are in Florida, do the leaves change color?

Jose Torres

Very slightly, not much, and they don’t fall.

Mary MacNamara

They don’t fall, great!

Jose Torres

So, it’s not a fall.  I’m very south southeastern Florida, the Miami Metro area, Boca Raton. Yeah, we see very limited seasonal changes, but right now it is hurricane season,

Mary MacNamara

Right.

Jose Torres

Alot of rain.

Mary MacNamara

Alot of rain, at least the hurricanes have missed. They keep going more in the middle of the ocean, which is nice, right?

Jose Torres

Yeah. Patrick Brown, our climate specialist, he’s been talking a lot about how this year we’re probably not going to get a hurricane in in the southeast United States, which is one of the areas that’s most vulnerable.

Mary MacNamara

Knock on wood. Okay, good, we’ll end it right there. That’s a positive thing. Alright, so Jose, once again, thank you so much for your insights. They’re brilliant. Really appreciate it. And as always, listeners you can learn more about our array of financial topics for free at interactivebrokers.com/campus and follow us on your favorite podcast network.

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