Google Had Its Worst Day in 22 Years the Same Day the Economy Grew 3.4%

At 8:30 a.m. Eastern on Thursday, the government said the U.S. economy grew at a 3.4% yearly pace this summer, faster than in the spring. By the close of trading, shares of Alphabet, Google's parent company, had fallen 12.6%, wiping out close to $500 billion of stock-market value. It was Alphabet's worst day since it went public in 2004.

Those sound like opposite stories. They're more connected than they look, and the rush to build AI data centers runs through both.

Last Friday we asked whether Microsoft, Alphabet and Amazon could still pay for their building with the cash their businesses bring in, or would have to raise money the way Meta was preparing to. This week they answered. For two of the three, the cash didn't cover it.

THE WEEK IN ONE SENTENCE

The AI building spree is now costing three of the four tech giants doing it more than their businesses bring in, and all four are borrowing or selling shares, just as a strong economy has markets betting the Fed's next move is up.

WHAT ACTUALLY CHANGED

• Growth sped up, though not as much as the 3.4% suggests. The economy grew at a 3.4% yearly pace, up from 2.2%, with computers leading business spending on equipment. But nearly half of the 3.4% came from businesses stocking up, and most of those computers were imported.
• Two more giants spent more than they brought in. Alphabet and Amazon each spent more on buildings and equipment in the quarter than their businesses brought in after paying the bills, as Meta did. For Alphabet it was the second quarter in a row.
• All four turned to lenders or shareholders. Amazon borrowed $48.1 billion in the quarter and Alphabet $28.7 billion. Meta lined up $37.5 billion of new stock, with up to $60 billion more planned. Even Microsoft, which can pay its own way, began its first U.S. bond sale since 2017, Bloomberg reported.
• Markets now expect the Fed's next move to be up. It held rates, but two of its 12 voters wanted an increase, and it upgraded its description of the economy's growth from "solid" to "strong."

WHY GOOGLE'S PARENT HAD ITS WORST DAY

Most of Alphabet's business is growing fast. Its sales rose 25% from a year earlier, to $127.6 billion in the three months to September. Google Cloud, which rents out computing power and sells business software, more than doubled its sales, to $30.7 billion.

What disappointed was its biggest business, search. Search sales grew 12%, to $63.4 billion, slower than the roughly 15% analysts expected, according to Fortune. Analysts it quoted said the slowdown would feed worries that AI answers are eating into Google's search ads.

The other problem is paying for the building. In those three months Alphabet spent $51.4 billion on buildings and equipment, mostly data centers and the servers inside them. Its business brought in $42.3 billion of cash after paying its day-to-day bills. That gap of about $9 billion is what's called negative free cash flow, and it was the second quarter in a row. And the building isn't finished: Alphabet said its spending will rise significantly next year.

That isn't the same as losing money. Alphabet still made a profit: when it counts profit, it spreads the cost of a data center over the years it will be used. The cash, though, goes out now.

Look at what Alphabet hasn't done. Companies with spare cash often buy back their own shares, which shrinks the number of shares and gives every remaining owner a slightly bigger slice of the company. In the first nine months of last year, Alphabet spent $39.8 billion doing that. This year, through September: not a single share. It hasn't announced a pause; its filings simply show none.

On Thursday investors sold. News reports and analysts pointed to both the slowdown in search and the cash going out.

The other giants show the range. Amazon's gap was the biggest of all: it spent $77.3 billion and brought in $42.4 billion. Its cloud business grew 39%, but its shares fell 4.2% in regular trading on Thursday, before it reported, and were down about 7% more in trading after the market closed, as of 8 p.m. Eastern. Microsoft, which brought in more cash than it spent, barely moved.

HOW THEY'RE PAYING FOR IT

Last week we said a company whose spending outgrows its cash has three doors: borrow, sell shares or slow down. This week nobody slowed down. Amazon kept its plan to spend about $220 billion this year.

Borrow. Amazon borrowed $48.1 billion in the quarter and Alphabet $28.7 billion. And on Thursday even Microsoft began selling at least $25 billion of bonds, IOUs a company repays with interest. It's Microsoft's first U.S. bond sale since 2017, according to Bloomberg.

Sell shares. Meta didn't wait for the nonvoting shares it approved last week, which can't exist before Jan. 19. It lined up about $97.5 billion in three pieces, its largest stock sale ever, though only the first two, $37.5 billion, are agreed so far:

• $25 billion of regular shares at $625 each. Meta locked in the price now but collects the cash later, by Nov. 19, 2027. That's called a forward sale.
• $12.5 billion of a hybrid called preferred stock. It pays investors 6.5% a year, like a bond, then turns into regular Meta shares in August 2029. This cash arrived Thursday.
• Up to $60 billion more, sold a little at a time on the stock market once the nonvoting shares start trading next year. Nothing is signed yet.

Selling new shares is the opposite of a buyback. Each existing owner's slice of the company gets a little smaller, which is called dilution, and the company gets the cash.

One buyer stands out. Nvidia, which sells Meta chips for its data centers, said it would put $3 billion into the sale, and that Meta plans to expand its use of Nvidia's equipment. A supplier is putting money into a customer that plans to buy more of its products.

WHAT THE 3.4% DOES AND DOESN'T TELL YOU

Now the other side of Thursday. The Commerce Department said gross domestic product, the value of all the goods and services produced in the U.S., grew at a 3.4% yearly pace from July through September, up from 2.2% in the spring. A yearly pace means growth in those three months, scaled up to a full year.

The AI build-out is visible in the details, though the government doesn't track AI spending separately. Computers led the rise in business spending on equipment: before imports are subtracted, they accounted for about 0.7 points of the 3.4.

Two things make the 3.4% look stronger than it is. First, businesses stocked up: bigger inventories added about 1.6 points, and that can reverse. Second, most of those computers were made abroad. GDP measures what's produced in the U.S., so an imported server is counted when a company buys it and then subtracted as an import. What stays is mostly the buildings, the American-made equipment and the work of putting it all together.

Underneath, though, demand was strong. Spending by American households and businesses, not counting the stocking up, grew at a 4.9% yearly pace, faster than in the spring. A lot of it went to imports, but it's the kind of number the Fed watches.

THE FED STOOD STILL. MARKETS THINK ITS NEXT MOVE IS UP.

On Wednesday the Federal Reserve left its benchmark interest rate, the short-term rate other borrowing costs build on, at 3.75% to 4%, after raising it in September. But two of the 12 officials who vote wanted another increase, and the Fed now calls the economy's growth "strong" instead of "solid."

Thursday's numbers pulled both ways. Prices were still rising well above the Fed's 2% goal: up 3.1% in September from a year earlier by its preferred measure, leaving out food and energy. Layoffs stayed rare. But households are feeling it: after adjusting for prices, they bought almost nothing more in September, and their income after taxes and inflation fell.

In the futures market, where traders bet on where rates are heading, prices on Thursday morning implied roughly an 80% chance of an increase at the Dec. 8–9 meeting, according to CME's FedWatch tool, about where they were the day before the meeting. That's a bet, not a Fed decision.

Borrowing costs eased a little on Thursday. The 10-year Treasury yield, the government's 10-year borrowing cost, was 4.98% by the Treasury's daily reading, down from 5.05% on Wednesday. The average 30-year mortgage rate fell to 7.24%, its lowest this month, Freddie Mac said, against 6.17% a year ago.

That matters for the tech giants, too. The interest on most of the bonds Amazon, Alphabet and Microsoft sell starts from what the government pays, like the 10-year yield, plus a charge for the company's own risk. The 10-year partly reflects where investors expect the Fed's rate to go, so bets on a December increase help hold that starting point up just as the giants are borrowing more.

THE NOISE CHECK

"Google's profit missed." It did fall short of analysts' forecasts, and much of the miss came from marking down the value of shares Alphabet owns in other companies, chiefly SpaceX, Alphabet said. That's a paper loss, not cash out the door. But even without it, profit fell short. The slower search sales and the cash gap are the news.

THE PART NOBODY EXPLAINS

The economy counts what's spent. Investors count what's left.

When Alphabet spends $51 billion on data centers, the government's count of the economy adds the American-made part of that spending in the quarter it happens, at full price, whether or not the data centers ever pay off.

Put together, the same spending shows up three ways: as growth in the economy, as a cost spread over years in the company's profits, and as a hole in this quarter's cash. At 8:30 on Thursday, the government counted the first. By the close, Alphabet's investors had weighed the third, along with slower search sales.

WHAT THIS SETS UP

Apple, Monday. It reports after the market closes. Watch whether it keeps buying back its own shares while Alphabet and Meta buy none.

The government's own borrowing, Monday and Wednesday. The Treasury says on Monday how much it expects to borrow in the coming months, and on Wednesday in what form, in the same bond market the tech giants are now tapping.

The Fed's December decision. Friday's employment cost index, a gauge of whether pay is adding to inflation, and the Nov. 6 jobs report will show whether the economy is still running hot. Strong hiring would add to the case for an increase when the Fed meets Dec. 8–9.

Meta's nonvoting shares, early next year. Meta has said it plans to start selling up to $60 billion more once they trade.

For most of this boom, the question has been whether anyone will pay for what AI produces. The cloud numbers say customers are paying. This week's question was the one underneath: who pays for the building? Mostly, still, the giants' own cash. But a bigger share than a year ago now comes from lenders and shareholders.

That is what the hell happened this week.