US Services Pick Up, Price Gauge Jumps to Four-Year High

The US service sector expanded in August by the most in six months, bolstered by strong demand and a pickup in business activity.

The Institute for Supply Management’s services index rose 1.3 points to 55.4, the highest level since February, according to data released Thursday. That exceeded the median estimate in a Bloomberg survey of economists. Readings above 50 indicate expansion.

New orders growth accelerated to the fastest pace since early 2023 while a measure of business activity was the strongest since 2022. Order backlogs expanded for the seventh consecutive month.

Twelve services industries reported growth in August, including mining, real estate and accommodation and food services. Five industries reported contraction. (…)

ISM’s measure of prices paid for materials and services in the sector climbed to 72.6 in August, the highest since mid-2022. (…)

S&P Global: Activity and new business intakes rise at fastest rates since end of 2024

The headline S&P Global US Services PMI® Business Activity Index posted 56.5 in August, up from 54.6 in July. Growth was the strongest for 20 months and well above the long-run trend.

Higher activity was frequently linked to strengthening demand, as new business rose at a steep and faster rate, the sharpest since the end of 2024. Panelists often cited new customer wins as a key driver of the upturn. US services firms also recorded stronger sales to overseas clients, signaled by the first rise in new export orders for nine months and the fastest increase since December 2024.

Employment increased solidly in August, with the rate of job creation the highest in just over a year-and-a-half. Panelists often linked hiring to efforts to keep pace with activity requirements. Capacity pressures remained evident, however, as backlogs accumulated at a solid rate that has not been exceeded since May 2022.

Input price inflation remained elevated in August and well above its historical trend, amid further reports of higher fuel and gas prices. That said, service providers indicated that cost burdens rose at the slowest pace since April 2025. Higher expenses led to another sharp increase in selling charges as firms sought to protect profit margins. Nonetheless, output price inflation eased to a nine-month low.

Finally, expectations for the year ahead remained positive overall at the midpoint of the third quarter, but were still below trend. Where firms forecast growth, they cited new product launches, investment, marketing activity and the release of pent-up demand as key sources of support. That said, uncertainty around the path of domestic and foreign policy continued to weigh on the outlook.

Survey data now point to GDP growing at an annualized rate of 3.0% in the third quarter, up solidly from the meagre 1.5% recorded in the previous quarter. Alongside a renewed improvement in new business intakes, growth appears likely to continue at least in the near term.

• Boom Lifts Bond Yields

Today, the S&P 500 had its best day in a month as Treasury yields edged lower and the dollar dropped to its lowest level since May. The policy-sensitive 2-year Treasury yield retreated to 4.34% after briefly rising to 4.41% on Tuesday. These moves reflect a decline in the probability of a September rate hike to about 50%, down from 70% earlier this week.

The catalyst was comments from Fed Governor Christopher Waller. While he said he’s willing to hold the policy rate steady if progress toward the Fed’s 2% inflation target continues, he also stressed that it would not take much evidence of persistent inflation pressures to support a hike. With recent data showing “some signs of disinflation,” the burden of proof is now on the inflation data to justify a hike.

The financial markets concluded that Waller is an owl, i.e., an FOMC voter watching incoming inflation data before deciding whether to vote for a hike at the Committee’s September 15-16 meeting. We reckon that of the 12 voters on the FOMC, five are hawks (i.e., ready to hike), while six are owls. That’s why bonds and stocks rallied today when Waller joined the latter birdies.

They also rallied today because the yen rebounded, without any intervention by the Bank of Japan, on expectations that the central bank will soon raise its policy rate and on second thoughts about a Fed rate hike. (…)

The August ISM PMI surveys suggest both manufacturing and services remain in good shape. Services continued to lead, with stronger business activity and new orders, while manufacturing stayed firmly in expansion territory with a PMI of 54.6. Prices paid remained elevated in both sectors, while growing backlogs and export orders suggest economic growth remains broad-based.

Meanwhile, inflation remains an issue. Prices-paid indexes stayed elevated in August, with the services measure jumping to 72.6, its highest reading since August 2022.

The jump in the services prices-paid index should warn the Fed, as the index has historically led headline PCED inflation (including goods and services) by about three months.

Furthermore, the prices-paid and prices-received averages from the regional Fed surveys have eased from recent highs but remain well above levels consistent with the Fed’s 2% inflation target. Historically, both have tracked core PCED inflation closely. (…)

Stagflation giving way to boomflation.

• BofA on August auto sales: August US light vehicle sales decreased -2.2% YoY (selling day adjusted) to a 16.8mm SAAR, a step up from 16.3mm in July and the Bloomberg consensus at 16.3mm. August brings YTD SAAR to 16.1mm (in line with our C26 light vehicle sales forecast), still below the 16.4mm level in 2025. We think [auto sales] continue to be supported by strength in upper income consumer cohorts & pent-up replacement demand from an aging vehicle fleet and all-time high miles driven. (@neilsethinew)

U.S.: The AI boom is turning the import basket on its head

Trade balance data released this morning in the United States showed a significant widening of the deficit in July, with the shortfall even reaching its highest level in 16 months.

This may come as a surprise to investors who are aware that the closure of the Strait of Hormuz has led to a sharp increase in petroleum product exports in the United States. Despite a decline in July, the report indeed showed that shipments in this category remained up by almost 30% compared to pre-crisis levels.

Given these developments, should we not have expected a smaller deficit?

Not in the current context, which is characterized by an explosion in investment in sectors related to artificial intelligence and a corresponding surge in imports in the segments most directly linked to this boom, which dwarfs the increase in energy exports.

And even for us, who have repeatedly emphasized the importance of AI to the U.S. economy, the international trade figures released today were truly staggering.

As today’s Hot chart shows, nominal imports in the segments most exposed to this new technology jumped no less than 20.2% month-over-month in July, capping a 240% increase since ChatGPT was released to the public in November 2022. (Imports in other sectors stagnated over the same period.)

While part of these gains certainly reflects significant price increases, the trend remains nonetheless impressive. This meteoric rise means that AI-related items now account for no less than 28.2% of total imported goods, up from a mere 11% at the beginning of 2025. And if the hyperscalers’ investment plans are to be believed, this trend could extend in the coming months.

How about an AI tariff?

US Share of Canada’s Exports Drops to 66%, Lowest Outside Pandemic

Canadian exports to the US decreased by 6.6% during the month, which was the steepest percentage decline since April 2025, Statistics Canada reported on Thursday. The overall share of Canada’s exports destined for the US fell to 66.3%. (…)

Canada’s exports to countries other than the US increased for a third consecutive month, rising by 7.4% and reaching a record high. (…)

A new survey conducted by Export Development Canada prior to the latest US tariffs coming into effect found 72% of Canadian exporters planned to enter new markets over the next two years, up from 65% five months prior. Confidence also improved, with the federal agency’s index rising to 71.7 from 69.7 at the end of 2025. (…)

• More than 300 Via Rail cars will be built in Canada in shift to domestic production, Carney says

The federal government will spend $4.7-billion to build and maintain more than 300 Via Rail passenger rail cars in Canada, using facilities in Quebec and Thunder Bay, Prime Minister Mark Carney announced Thursday.

At a news conference in the northwestern Ontario city, Mr. Carney said the move represents a shift away from importing trains from south of the border. (…)

“For the first time in four decades, those cars will be produced and assembled and maintained in our country. Cars that used to be built in the United States will be built right here in Thunder Bay, at Alstom, by the best workers in the world,” he said. (…)

Via’s most recent trainsets are from Siemens Canada and were built in Sacramento, Calif. Siemens received a $989-million contract in 2018 to build 32 trainsets for the Quebec-City Windsor corridor. (…)

[Carney] said talks between the two countries will resume at the appropriate time.

“But the most important thing we can do is not to spend all our time waiting by the phone, waiting for a call … refreshing on social media to see what’s coming across. No, it’s building. It’s building here,” he said. (…)

Volkswagen to slash up to 50,000 jobs in historic restructuring

Volkswagen’s supervisory board has reached a surprise unanimous deal to back chief executive Oliver Blume’s sweeping overhaul that will see the German carmaker slash up to 50,000 jobs and could lead to plant closures.

The company told investors on Thursday evening that the restructuring would be “the most extensive transformation programme” in its history.

The announcement comes after Blume earlier this year outlined a plan that could result in the reduction of up to 100,000 jobs and the closure of as many as four plants in Germany. The 50,000 job cuts envisaged under Thursday’s plan would be in addition to 50,000 reductions since 2024, according to the company. (…)

The carmaker, which employs 652,000 people and is a titan of German industry, has been hit hard by the rising competition from Chinese carmakers, US tariffs and lacklustre sales in its European home market since the pandemic. The group’s vehicle sales fell 8.4 per cent in the first six months of 2026 compared with the same period last year, while operating profit declined by 11.6 per cent.

Only 24 hours earlier, prospects were grim that an agreement could be reached between the management, unions and the state of Lower Saxony, which had been locked in lengthy and acrimonious talks since Blume’s plan first surfaced in late June. (…)

The carmaker said that its supervisory board “acknowledges” that its “European capacity currently exceeds demand by more than 500,000 units.” (…)

VW said it was seeking to lift its operating margin to 9 per cent by 2030, up from just 3.8 per cent in the first half of this year. It will axe one in two models over the coming nine years in an attempt to reduce complexity and lower unit costs of the remaining models owing to higher economies of scale.

FYI, BYD’s EBITDA margins:

Norway’s Massive Oil Fund Proposes Cut to Government Bond Holdings

This was the WSJ and Bloomberg’s headline. The FT’s was more direct:

• Manager of Norway’s $2tn oil fund proposes slashing US Treasury holdings

The manager of Norway’s $2.3tn sovereign wealth fund has proposed an overhaul of its government bond portfolio that could see it slash its holdings of US Treasuries by about $80bn, as it looks to other types of debt to try to boost returns.

Norges Bank Investment Management said in a letter to the country’s finance ministry on Tuesday that it recommended reducing the weighting of government debt in the fund’s benchmark bond index from 70 per cent to 50 per cent.

NBIM’s proposal is to cut the fund’s exposure to US Treasuries by 12.2 percentage points, while increasing its holdings of non-government US fixed income by 11.4 percentage points, the letter said. This would lead to a reduction of almost $80bn in its allocation to Treasuries, according to FT estimates.

These MBS are largely backed by government agencies, meaning Norway’s exposure to the risk of a US government default is only being reduced modestly. They do, however, offer slightly higher yields than Treasuries because of the risk that mortgages are repaid early. (…)

The fund’s US dollar exposure would be “essentially unchanged” despite the proposals, said a NBIM spokesperson. According to the letter, the fund’s dollar exposure would fall by 0.5 percentage points. Its US allocation is below the weighting used in most global indices.

The proposals come after comments by finance minister Jens Stoltenberg in April that the fund had “no plans to reduce our exposure in the US”, even though some Norwegian lawmakers had suggested the fund was overexposed to US assets. (…)

Some could see a link with this news:

Netherlands Moves Gold From New York to London, Citing Geopolitical Unrest

The Dutch central bank shifted the location of 78 metric tons of gold, worth $11 billion at today’s prices, from vaults beneath the streets of Manhattan to London, saying it would improve the ability to trade the metal in a pinch. (…)

“In view of increasing geopolitical unrest, DNB is strengthening its crisis preparedness,” the central bank said in a statement referring to its Dutch acronym. The central bank also moved some gold from vaults in Canada. (…)

The bank didn’t specify what it meant by geopolitical unrest. The move follows 18 months in which relations between the U.S. and Europe have frayed over tariffs, President Trump’s threats to seize Greenland and his equivocation over America’s military backing. (…)

And with this older one:

• US gives $20bn to Ukraine funded by seized Russian assets

In a June 2025 Brookings commentary:

The Trump administration has not articulated a policy on frozen Russian assets. Secretary of State Macro Rubio and then-National Security Advisor Mike Waltz have mentioned the issue, both mistakenly saying that the assets have already been seized.

Special Envoy Keith Kellogg has repeatedly referenced using Russian assets. Asked whether asset seizure is administration policy, Kellogg said “I think the options are to apply more pressures—I think that’s good. I don’t think it’s been done, but I think the opportunity is there to do it, and that’s going to be up to the president of the United States.”

Vice President JD Vance has argued against seizure on the grounds that it could harm the dollar. 

Several senior members of Congress favor seizing the frozen assets. At the Munich Security Conference in February 2025, Senators Jim Risch (R-ID) and Jeanne Shaheen (D-NH), chair and ranking member of the Foreign Relations Committee, and Senators Lindsey Graham (R-SC) and Sheldon Whitehouse (D-RI) wrote in a press release that “America and our transatlantic allies must unlock more support for Ukraine, through the actual seizure of the underlying frozen assets or through, for instance, using those assets as collateral for another, larger loan for Ukraine.”

In March, Senators Graham, Todd Young (R-IN), Richard Blumenthal (D-CT), and Tim Kaine (D-VA) wrote to Secretary Rubio asking him to clarify the administration’s seizure policy. Among other things, they asked if the administration supported seizure, whether it would push our G7 allies to join us in seizure, and whether it supported using the money to purchase military equipment.

In June 2026:

A bipartisan group of U.S. senators introduced legislation on June 18 that would allow frozen Russian assets under U.S. control to be used for the purchase of military equipment for Ukraine.

The proposed Seized Assets for Battlefield Equipment and Readiness (SABER) Act would expand existing U.S. authorities, allowing Kyiv to use seized Russian assets to strengthen its military capabilities as Russia’s full-scale war continues.

The initiative builds on the Rebuilding Economic Prosperity and Opportunity for Ukrainians (REPO) Act, adopted by the U.S. in April 2024. The law granted Washington legal authority to transfer Russian sovereign assets under U.S. jurisdiction to support Ukraine. (…)

The bill was introduced by Republican senators John Cornyn, Roger Wicker, and Chuck Grassley, alongside Democratic senators Tim Kaine, Chris Coons, and Sheldon Whitehouse.

A companion bill in the House of Representatives is being led by Representative Joe Wilson. (…)

The Trump administration has previously argued that frozen Russian assets could play a role in a future settlement between Moscow and Kyiv. One U.S.-backed peace framework envisioned that a portion could be directed into a future U.S.-Russia investment mechanism.

Recently:

• The U.S. military successfully seized multiple massive oil tankers (such as the Skipper and Sophia) off the coast of Venezuela.
• The U.S. Department of Energy confirmed that the U.S. has been selling off the seized oil.

Last week:

• U.S. to Take Control of Much of Venezuela’s Proven Oil Reserves

“At my direction, Secretary of State Marco Rubio, and Secretary of War Pete Hegseth, working closely with Highly Respected Interim President of Venezuela, Delcy Rodriguez, and, through a partnership with private business, have secured majority U.S. control of more than 65 BILLION BARRELS of proven Oil Reserves in Venezuela, at no cost to the American Taxpayer,” the president said on social media.

Probably all coincidences…

BTW:

US Grip on Venezuelan Oil Threatens Billions Owed to China

After announcing plans to seize control of more than 65 billion barrels of Venezuela’s crude reserves, the Trump administration made clear that was only the start. Ahead is a campaign to squeeze out China and powers like Russia that the White House has called “malign foreign actors,” in a push to ensure “American dominance in our hemisphere is never again questioned.”

Next on Washington’s agenda is an attempt to restructure Venezuela’s debt, which includes billions of dollars owed to China. US Energy Secretary Chris Wright on Wednesday declared Beijing won’t have any claims to revenue from new Venezuela production — severing one channel for making repayments.

The US has cast its campaign as the latest chapter of the “Donroe Doctrine,” codified in the White House’s National Security Strategy and which asserts a unilateral US right to deny rival powers the ability to own or control “strategically vital assets.” Under that banner, taking Venezuelan oil fields from Chinese companies is a geopolitical opportunity to align them with Washington’s interests. (…)

China’s reaction so far has been relatively muted. Foreign Ministry spokesperson Guo Jiakun said China’s legitimate rights and interests in Venezuela “must be protected,” at a regular briefing in Beijing on Thursday. “Cooperation between China and Venezuela is protected by international law,” he added. “It doesn’t concern any third party.” (…)

The bigger blow might be to the billions of dollars in debt owned to Chinese banks, which is tied to undelivered oil barrels. While Caracas stopped publishing detailed information about such liabilities after its sovereign default in 2017, the total debt pile to China was believed to total at least $10 billion as of 2025.

That figure has already come down considerably from its peak. China first began financing Venezuelan infrastructure and energy projects in 2007 under former President Hugo Chávez. Publicly available data suggests Chinese state banks had extended more than $60 billion in oil-backed lending to the country by 2015.

As US sanctions on Caracas intensified over the following years, China emerged as Venezuela’s largest crude customer and its most significant foreign creditor. State-run companies including China National Petroleum Corp., the parent of PetroChina Co., and China National Offshore Oil Corp. developed oil and gas projects in the Orinoco heavy-oil belt and elsewhere. (…)

BTW #2: Trump-linked companies race to secure deals for Venezuela’s oil Appointees, a donor and a recent administration official are among those capitalising on US control of beleaguered energy sector

Note: Sorry for delays today. My host was in maintenance mode.

Fed’s Beige Book Shows Economic Activity Up Modestly

US economic activity increased modestly in the past two months with demand from data centers, in particular, driving growth, the Federal Reserve said.

The outlook for the economy was “positive,” according to the US central bank’s Beige Book survey of regional business contacts released Wednesday, though sentiment was mixed across sectors amid uncertainty about energy prices and geopolitics.

While spending on high-end purchases was solid, the report also noted increased price sensitivity. Manufacturing activity grew across most of the Fed’s districts on the back of demand for defense and data-center orders. Employment rose slightly across the country. (…)

Prices, meanwhile, accelerated moderately in most districts.

“Consumer-facing contacts in a few districts noted that heightened price sensitivity among customers was putting a limit on their ability to pass through input price increases,” the report said. (…)

But the Atlanta Fed’s GDP Now has Q3 GDP up 4.8%!

New York Fed President John Williams yesterday echoed Scott Bessent: rising Treasury yields are driven by “a strong US economy and a strong economic outlook fueled by big investments in AI and data centers and technology in general.”

AI-related growth is offsetting whatever weaknesses there are. Note that this chart has a single scale.

One of the problem with AI growth is that its urgency makes it totally insensitive to prices and financing costs. Nvidia is also acting as the central banker of the AI economy.

Williams rightly said there are “no clear signs right now” whether current policy is sufficient to return inflation to target.

There are also no clear signs that monetary policy actually matters nowadays. Read on.

The Bond Market’s Signal Is About to Get Louder More aggressive rate hikes will be needed to tame inflation and bond yields that have yet to peak.

The Treasuries market is flashing a warning signal: the US economy has become increasingly insensitive to interest rate increases by the Federal Reserve. To combat inflation and tame yields on long-dated debt, more aggressive hikes will be needed. That means bonds will keep losing value as yields have yet to peak.

• The transmission of monetary policy has become slower and more uneven, with pockets of acute vulnerability in consumer credit and corporate debt too.
• In this environment, modest interest rate increases fall short, allowing inflation to be sticky enough to push measures of long-term price expectations higher.
• Yields on long-dated Treasuries, that peaked around 5% in the last hiking cycle, could push even higher this time.
• While equities are resilient as earnings and spending grow, the risk of more Fed rate hikes acts as an overhang on the market.

(…) The single largest structural change is the dominance of long-term fixed-rate mortgages. In the 1980s, adjustable-rate mortgages were far more prevalent. That meant Fed hikes transmitted almost immediately to household budgets. Today, the vast majority of US homeowners hold 30-year fixed-rate mortgages. And since many of those were refinanced at historically low rates during 2020 and 2021, debt-servicing costs remained around 10% of income despite the 2022–2023 hiking cycle.

On the corporate side, it’s similar. In the 1980s, corporate America carried more floating-rate bank debt and had less access to deep, long-duration bond markets. Investment-grade and high-yield bond markets since then have allowed companies to lock in long-term fixed-rate financing, reducing their immediate exposure to rate moves. (…)

The pain of higher rates was meted out, then, to lower-income borrowers via credit cards and auto loans. That produced a K-shaped outcome, or a so-called ‘vibecession,’ which in parts of the economy was very real. The double whammy of inflation and higher interest rates disproportionately impact lower-income households and small businesses. (…)

Thanks to AI spending, recession is even less of a concern this time around. (…)

• One important point is that this is a global selloff, which makes it hard for the US to buck the trend.
• No one knows where the tail risks are yet. They could be in Japan, where intervention is ongoing.
• Meanwhile, the bond market’s gains after US Treasury buyback plans were announced have evaporated.
• The potential for the Iran War to last into 2027 heightens the risks.

Add urgent military spending, urgent green spending, urgent supply chain spending, all price insensitive.

But more and more Americans are price sensitive:

• The owner of the Circle K brand reported fuel revenues of $16.7 billion in its fiscal first quarter, up 33% from the same period last year. Same-store fuel volumes fell by 1.6% in the US and 4.3% in Europe and other regions, and increased by 1.1% in Canada. Same-store merchandise revenues rose by 1.7% or less across all markets in the period ended July 19, largely missing estimates from analysts surveyed by Bloomberg, and well below inflation.
• The 60+ day delinquency rate on US subprime auto loans is up to ~5.2%, the highest on record. This figure has more than doubled over the last 4 years. Serious delinquency rates on subprime auto loans are now ~1.7 percentage points above their 2008 Financial Crisis peak. At the same time, 60+ day delinquencies on prime auto loans are up to ~0.4%, near their highest since 2011. Meanwhile, total US auto debt surged +$28 billion in Q2 2026, to a record $1.71 trillion. Americans are falling behind on their car payments at a historic rate. (@KobeissiLetter)

One offset:

America’s Population of 401(k) Millionaires Keeps Growing, Buoyed by Markets

The number of millionaire 401(k) accounts at Fidelity Investments rose 19% to a record 769,000 between the first and second quarter, according to a report released Thursday. It was the largest quarterly increase since the fourth quarter of 2023, the company said.

Aiding savers was a blockbuster quarter for equities. The S&P 500 Index gained about 15% in the three months ended June 30, its strongest performance since 2020. The average 401(k), 403(b) and IRA account balances on Fidelity’s platform rose to all-time highs, while savings rates for workplace retirement plans also held at record levels, the company said. (…)

Retirement savers are hitting the landmark even while many report feeling underprepared for their later years. The share of workers who say they feel confident about having enough money to live comfortably throughout retirement fell to the lowest level since 2017, according to a joint Retirement Confidence Survey from the Employee Benefit Research Institute and Greenwald Research released earlier this year.

Debt, inflation and rising housing and healthcare costs are hampering savings plans, according to the research. Others are worried about the future of Social Security. New projections from June estimate that the Social Security Trust Fund may be depleted by 2032.

Estimates vary widely on how much people need to save for retirement. The size of that nest egg depends on where they live, their expenses, financial goals and desired standard of living. Americans say they need $1.46 million on average to retire comfortably, according to Northwestern Mutual’s 2026 Planning & Progress Study. (…)

“It’s maybe not as big a deal to be a millionaire as it might’ve been when you watch Gilligan’s Island in the ‘60s,” he said. “The millionaire was a rich person. Now, it just doesn’t go as far as it used to.” (…)

At some point, interest rates will start to bite.

• On spending
• On margin debt

Margin debt, as it has during other speculative periods, is growing considerably faster than either credit card debt or mortgage debt. Maybe the Federal Reserve (Fed) should consider hiking margin requirements instead of the fed funds rate? (RBA)

• On asset allocation. 10Yr yields at 5%+ with inflation below 3% and a resolutely (?) hawkish Fed could become more widely appealing.

Especially if productivity offsets other inflationary pressures:

Dell Results Suggest AI Productivity Boom Is Here

Dell Technologies’ stock price is soaring. The company delivered a major beat across the board for its fiscal 2027 second quarter (ended July 31), driven by massive, accelerating demand for AI infrastructure and strong legacy hardware performance.

Revenues and earnings rose 58% y/y and 203%, respectively. AI server revenue rose 100%, while traditional servers and networking revenues rose 122%.

The results confirm that the AI infrastructure buildout remains in full swing. Strong demand for AI compute capacity points to accelerating AI adoption across the economy, which we think will drive a productivity boom. (…)

Productivity growth has rebounded since it last bottomed in Q2-2017 at 0.85%, based on the annualized average of its seven-year growth rates. It rose to 2.4% during Q2-2026, slightly exceeding its historical average of 2.3%. We predict that this growth rate will rise to 3.0%-4.0% by the end of the decade.

From the NY Fed:

AI Adoption Has Become Much More Widespread in the Workplace

Our August business surveys asked firms in the New York and Northern New Jersey region whether they used AI as part of their business processes in the past six months, questions we have asked each year since 2024.

AI adoption in the workplace has continued to increase sharply and has now become widespread. As shown in the chart below, 61 percent of service firms reported using AI this year, up from 40 percent last year and 25 percent in 2024.

Businesses in knowledge-intensive sectors, such as information, business services, and finance, had the highest usage rates. Among manufacturers, 51 percent reported using AI as part of their business processes, roughly double the 26 percent from last year and triple the 16 percent in 2024. These shares are toward the high end of the range of existing studies of AI use in the workplace.

While AI adoption has become widespread, most firms have made only limited investments in the technology. Three-quarters of service firms and more than 90 percent of manufacturers characterize their AI investments as minimal to modest, ranging from use of free AI tools to allocating a small share of overall spending to AI tools or services.

Meanwhile, just 15 percent of service firms—but no manufacturers—indicate they have committed significant resources to AI adoption, with only about 5 percent of service firms characterizing AI adoption as a major strategic investment. Among AI adopters, the median share of workers using it was just 17 percent for service firms and 7 percent for manufacturers.

In short, AI adoption in the workplace is now fairly broad but investments and worker usage remain limited.

With AI use in the workplace now widespread, why have some businesses refrained from adopting it?

(…) cost does not seem to be the main deterrent—it was among the least cited reasons by non-adopters. About half of non-adopters said the type of work they do does not lend itself to AI, while roughly a quarter indicated AI is currently not good enough to provide benefits to their business.

There were also some concerns about using AI. More than a third of non-adopters were concerned about data privacy, security, or confidentiality, and a similar share expressed concerns about accuracy or reliability. Further, roughly a third indicated they currently lack staff with the technical skills to use it effectively. (…)

Consistent with our earlier surveys, existing workers are much more likely to be retrained than replaced by AI. Among businesses that use AI, just over a third of service firms and more than 20 percent of manufacturing firms report retraining workers in response to AI. Firms report retraining workers across the educational spectrum, though somewhat more of those with college degrees.

These findings align with the broader research literature, which also tends to find limited labor market effects from AI adoption so far in terms of layoffs or reduced hiring. However, one recent study suggests entry-level workers may be affected significantly, as AI can substitute for routine tasks often performed by newer employees, potentially creating barriers to workforce entry even as it enhances productivity for experienced workers. (…)

Evidence from our surveys so far confirms what many studies are showing: that AI has been more likely to augment workers than replace them.

The most striking number in Dell’s release was that Dell’s AI-optimized server revenue came in at $16.4 billion, up 100% year over year. Crucially, the AI server business had a record $95 billion backlog as of the end of the second quarter. Companies are rapidly equipping for AI.

• AI Data Center Spending to Reach $32 Trillion by 2050, PwC Says

Global data center spending is set to reach $31.6 trillion through 2050 to meet the world’s growing appetite for AI, an investment boom with no precedent in history, according to PricewaterhouseCoopers LLP.

Dwarfing projects such as the railways, internet and electrification, spending on data centers could even hit $50 trillion over the next two and a half decades if AI adoption accelerates beyond PwC’s “central scenario” forecast, the firm said in a report Wednesday. For comparison: the US gross domestic product is roughly $30 trillion. (…)

The bulk of the spending will go into what fills the data centers — hardware from companies such as global AI chip leader Nvidia Corp. (…)

Spending will keep rising through mid-century as graphics processing units, servers, storage systems, networking equipment and other hardware will require routine replacement. Recurring chip upgrades — the computational power — and not land or construction, will account for most of the investment, quite unlike traditional capex cycles like prior generations of memory chip production or the global fiber internet rollout, which “front loaded” investments, taking on costs and risks upfront. (…)

On an annual basis, global data center spending will increase from about $800 billion this year to $1.1 trillion in 2030 and $1.8 trillion in 2050, PwC predicted. China and India will drive the largest share of incremental demand, supported by large populations, rapidly expanding digital economies, and substantial headroom for AI to embed in business and consumer activity. (…)

While global demand is strong, factors such as power availability, data sovereignty requirements and the flow of semiconductors will determine which regions capture the investments, PwC said. Power will be the foremost factor that shapes where AI infrastructure investment occurs.

Indeed, much of the forecast hinges on how fast reliable electricity supply for data centers can be established, according to the report. Affordable, reliable, and increasingly low-carbon electricity at scale is the hardest requirement for many markets to meet.

And while the researchers’ projection assumes a fairly open trading system where chips move freely across borders, disruptions in semiconductor supply chains could cut global investment by nearly 20%, they said. Meanwhile, a growing sovereignty push could redistribute, but not reduce, global investment.

“The $31.6 trillion question isn’t whether the capital exists. It does,” the researchers said. “Nor is the question whether the demand is real. It is. The question is which regions, operators, and institutions are positioned to capture it and which aren’t.”

Elon Musk Monday warned that the artificial intelligence industry is racing toward an imminent global power crisis, predicting a massive 15-gigawatt energy shortfall by 2027. Musk said that electricity has officially replaced chips as the primary bottleneck for AI development.

He revealed that AI deployment is growing exponentially at 40% to 50% annually, while power capacity outside of China is crawling forward at just 10% to 20% per year.

Without a rapid intervention in power infrastructure, Musk warned that billions of dollars in advanced AI processors will sit completely idle.

Musk noted that while China possesses substantial electricity infrastructure, strict GPU export bans limit their chip access. Conversely, Western tech hubs have the chips but lack the raw wattage to support them

I bet it will be easier for China to solve its chip problem than for the US its power challenges.