AI Data Center Construction Goes Nuts, Power Plants Take Off, but Spending on Factories Is still Twice as Big as Data Centers

Construction companies are now facing the second wave of inflation. By Wolf Richter for WOLF STREET. The amount spent on the construction of data centers spiked by another 7.5% in August from July, and by 73% year-over-year to a seasonally adjusted annual rate of $85 billion, according to construction data from the Census Bureau today. Since the beginning of 2021, the annual rate of construction spending on data centers has spiked by 823%. These amounts only reflect the construction costs of the buildings, the improvements around the buildings, and the equipment integrated into the buildings, such as HVAC systems. But that’s the cheap part of a data center. Not included here is the expensive part: equipping the completed data center buildings with servers and racks, with electronic and optical equipment to connect the servers to the internet, and with the electrical equipment that supplies the servers with prodigious amounts of power, including in many cases onsite diesel or gas-turbine power generators. Though nothing that needs to be funded can grow on an exponential curve for long, the AI data center construction mania is continuing along a near-exponential curve for now, despite increasing efforts on the ground by people, municipalities, and state governments – including in Texas! – to slow it down or block it. Data centers, their demand on power, their effect on electricity prices, and related issues have entered midterm election rhetoric. Building the data centers and purchasing the equipment has sent shockwaves of demand through big parts of the industrial economy: WHOOSH, Go Orders at US Manufacturers of “Core Capital Goods,” Fueled by the AI Infrastructure Boom: Attracting the skilled labor to build the data centers and install the equipment and get it up and running has sent shockwaves of demand through the labor market, with reports of labor shortages emanating from other projects, as specialists get pulled away by data center projects’ whatever-it-takes approach to spending, including on salaries for highly skilled labor. Construction of power plants and distribution infrastructure has also taken off, though planning and permitting takes years before construction can even start.Construction spending in the power sector rose by 0.8% in August from July and by 8.5% year-over-year to an annual rate of $186 billion. Since the beginning of 2021, the spending rate has increased by 58%. Power plant construction spending includes the costs of the power generation equipment, unlike data center construction costs that do not include the servers and related equipment, which are the most expensive part of a data center. Factory construction spending growth – “growth,” not actual spending – has taken a backseat to the mania of data centers; “actual spending” on factory construction ($168 billion annual rate) is still nearly double the spending on data centers ($85 billion annual rate). Spending on factory construction at an annual rate of $168 billion in August was unchanged from July, and down by 19.8% year-over-year. But it was still 126% higher than what it had averaged over the six-year period 2015-2020. The costs of the production equipment inside the factory – such as industrial robots and systems that produce semiconductors – are not included in these figures here, though they can dwarf the costs of the building. Once the factories are built and equipped and production starts, their real contribution to the economy and employment begins and continues for decades. Building a factory is not a one-time shot but a long-term contribution to US production. It’s not the construction spending per se that matters but the future production that will come from these factories. Construction companies face the second wave of inflation. The Producer Price Index (PPI) for construction materials – steel mill products, concrete, lumber, gypsum, etc. – spiked by 10.1% year-over-year in August. And since the beginning of 2025, when this second wave of inflation started, this PPI has spiked by 15.8%. The PPI for nonresidential construction services spiked by 9.4% year-over-year and by 11.8% since the beginning of 2025. In case you missed it: Not Even the Massive Changes of Methodology Can Get PCE Inflation Back into the Bottle Enjoy reading WOLF STREET and want to support it? You can donate. I appreciate it immensely. Click on the mug to find out how: I looked in my crystal ball and saw big empty cavernous buildings dotting the land, turned into mini apartments for the proletariat “Data for what?” Winston asked Orwellian Yeah, I had to pay a construction worker an extra $20 to whistle at me when I walked by. I’m looking for an inflation caused bust as this is all being funded by ever increasing expensive debt. In all sectors. 30-year mortgage rate posts biggest jump in 4 years — to nearly 7.3% These numbers are firm commitments. Eventually, compute and inference efficiency will dramatically reduce the volume of servers required. Right now, their internals will be mostly provided by NVDA ecosystem providers. And those servers will be on line for many years 5+, etc. (Compute will be made more efficient on current technology). Inference efficiency will reduce the average load on each server. (Relative Compute capacity increasing) The slow down in construction will come later than the installed capacity becomes adequate. (Late 2028 earliest) Two principles: 1. Close the gap with haste. 2. Drive efficiency once the gap is closed. We are in the gap closing phase and will be for at least the near term. Now, here’s the best part. The installed servers have D&A schedules that are specified when the Capex was approved. They will OCCUPY space (even at significant relative inefficiency to latest models) and drive new green field construction for frontier model server technology. This is due to space AND architecture gaps between prior gen and next gen hardware. As a result, we MUST over build. The question is BY HOW MUCH? That is unless there is no value in the product. (There is) BH – thank you so very much for your AI slop… And who is going to be paying for all of this? Apparently someone thinks there is a big payday down the road. Perhaps Software As A Service That You Can Only Buy From Us! SAASTYCOBFU sounds about right Investors already paid for it and are continuing to pay for it. They already kissed their money good-bye, so if it doesn’t come back, fine. The spending spikes on all these different categories make me wonder how much the overturning of Trump’s tariffs is affecting all this. A lot of these materials and electronics are being imported – but at what tariff rate I wonder? What does a made-in-China server rack, metal cutting saw blade, or electrical box cost to import nowadays? Could the perhaps-temporary drop in tariffs have led to a surge this year, from buyers trying to get supplies in before the next bout of the trade war?