When a Data Center Comes to Town

Head of US Public Policy Strategy Ariana Salvatore and US Thematic Strategist Michelle Weaver, alongside Senior Economist and Strategist in Morgan Stanley’s Private Wealth Management Sarah Wolfe, examine the economics of the AI datacentre boom, the pushback and the policy implications.

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Ariana Salvatore: Welcome to Thoughts on the Market. I'm Ariana Salvatore, Head of Public Policy Research at Morgan Stanley. 

Michelle Weaver: I'm Michelle Weaver, U.S. Thematic and Equity Strategist. 

Sarah Wolfe: And I'm Sarah Wolfe, Senior Economist and Strategist with Morgan Stanley Wealth Management. 

Ariana Salvatore: Today: the politics, economics, and market implications of America's AI data center build-out. 

It's Tuesday, August 4th at 10am in New York. 

AI infrastructure spending is becoming a major force in the U.S. investment cycle. But as you've heard on this podcast in recent weeks, local resistance to data centers is growing, and projects worth hundreds of billions of dollars are being canceled or delayed. 

More than 300 local moratoria have passed since 2023, and restrictions now touch 40 states. Now, most are temporary pauses, not outright bans, but the community opposition is tangible. 

For investors, the key question is how these local pressures shape the broader build-out. So, I wanted to talk to you both because, Sarah, you've looked at this on the local level, and Michelle, you've been leading some of our thematic work on this topic. 

So, Sarah, maybe we'll start with what happens when a data center comes to town. How does a large project ripple through a local economy, especially when so much of the expensive hardware is imported? 

Sarah Wolfe: I think we need to look at the data center build-out from two lenses. First, at the national level, and then what's really happening at the local level, county by county. 

So, at the national level, the headline investment can actually overstate the contribution to GDP because a lot of the components that go into data centers – think chips, servers, networking equipment – most of that is imported. So, it's actually an offset in the GDP accounting.

But when we analyze the AI build-out at a local level, we see that the town experiences the project very differently. A data center still needs a physical shell, concrete, steel, electricians, construction workers, and then the restaurants that feed the construction workers. 

So, the local multiplier depends on how much of that spending around the data center stays nearby. Workers are going to get paid, local suppliers win contracts, and nearby businesses will see more demand. And then importantly, governments may collect more property and business tax revenue. When we look at county-level research on the AI data center build-out, we do see positive effects on employment, business formation, wages, income, and tax returns. 

So, these data centers are significant. They do have significant multipliers. But we need to dig a little bit deeper and look at how it affects different counties. 

Ariana Salvatore: So, it sounds like there are some local economic benefits. How durable do you think those are? 

Sarah Wolfe: Some of the effects are durable and some aren't. The largest and most important effects come through employment in the near term. If we look at the construction phase of these projects, let's look at a data center that's 250,000 square foot, in Virginia. That supports more than 1,500 workers during construction. 

But then, if we look at what happens after construction is done, there's only about 50 full-time workers once it's operating. And I will say I think that's a high-end estimate. If you look at how many workers these data centers employ state by state, some numbers are 10, some numbers are 20, and some are 30 employees. So, 50 is maybe on the higher end. 

So, the bottom line is that the labor market multiplier actually fades after the facility comes online. What does persist, are the smaller share of data center processing jobs, ongoing supplier and service activity, and then importantly, of course, the property tax base. 

But even that fiscal benefit depends on how the incentive package is designed. If a locality, for example, grants a very large, long-lived sales or property tax exemption, it may give away much of the revenue that made the project attractive in the first place. 

So, the job story is real, but it's much more front-loaded. And then the tax revenue story is real too, but it really matters on how the locality negotiated the incentive package. 

Ariana Salvatore: So, it sounds like there are some benefits and some potential drawbacks. How do you think communities should judge whether a trade-off like that is worth it? 

Sarah Wolfe: I think communities should be asking this question of how much spending and tax revenue actually stays local after all the incentives? How many jobs remain after construction? Who pays for new generation transmission, water system, and roads? And who bears the spillovers through utility bills, housing costs, or land use? 

The evidence does suggest that data center growth can lift incomes and expand the tax base. But it also raises home prices. And as we know, it raises electricity prices as well. A typical AI data center may use as much electricity as 100,000 homes, so cost allocation is critical. The strongest agreements make b