The Big Idea
Business investment and AI
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Survey and anecdotal evidence confirm that many businesses moved to the sidelines for a significant part of 2025, at least measured by business investment. But in the end, business investment posted healthy gains. As it turns out, the AI frenzy bailed out the sector. Looking ahead for 2026, the policy landscape should clear up enough to generate a broadening of investment strength, adding to what is likely to be a continuation of the torrid AI buildout.
A Narrowly driven gain in 2025
In the end, business investment spending in real terms performed better last year than I had expected. In the GDP accounts, business fixed investment is divided into three main components: structures, equipment and intellectual property. In the first three quarters of the year, real business fixed investment increased at a 6.7% annualized pace, a slight acceleration from the 6.0% rise recorded in the four quarters of 2024.
Last year’s gains, however, were narrowly focused. In fact, the entire advance came in the technology space. The “information processing equipment” line item within equipment and the “software” line item within intellectual property more than accounted for the overall rise (Exhibit 1).
Exhibit 1: Real business fixed investment
Source: BEA, BLS.
To be sure, not all technology outlays in 2025 were directly related to AI, but it is safe to assume that most of them were. As the bottom row of the table shows, investment outside of the two technology line items, which accounts for almost two thirds of the total, fell outright in real terms in the first three quarters of the year. These figures underscore the story that businesses broadly were quite cautious last year, waiting for clarity on key policy parameters, most notably tariffs. Every ISM Manufacturing Survey report over the past six to nine months offers explicit confirmation of this narrative.
In any case, the data support the 2-track performance of business spending, with technology and AI surging while outlays for old-school machines and structures languished.
Hopeful signs
The tone of monthly ISM surveys, especially for the manufacturing sector, suggests that businesses are still struggling with navigating the administration’s unpredictable tariffs strategy. However, a few Federal Reserve bank presidents have recently noted that the business contacts are telling them that they are beginning to re-engage. One theme mentioned by some is that firms can only remain paralyzed for so long before they have to move forward, even if uncertainty remains an impediment to planning Moreover, with the administration needing desperately for the economy to perform better heading into the mid-term elections in November, I would expect a more growth-supportive tone out of the White House going forward.
Although the business community may remain largely cautious aside from the AI frenzy, there is evidence that a thaw has already begun. Core capital goods orders and shipments have perked up (Exhibit 2, Exhibit 3).
Exhibit 2: Core capital goods orders
Source: Census Bureau.
Exhibit 3: Core Capital Goods Shipments
Source: Census Bureau.
Core capital goods orders (the “core” excludes defense and aircraft) have picked up since mid-year. In the first six months of 2025, this measure barely rose at all (in nominal dollars), but it has posted monthly advances of 0.7%, 0.9%, 1.0%, 0.5%, and 0.4% from July through November, an annualized rate of increase of over 8.5%.
There’s a similar pickup for core capital goods shipments. Through the first eight months of the year, the cumulative gain amounted to only about 2½%, an annualized pace of just over 3.5% (in nominal dollars). However, the measure posted rises of 1.2% in September, 0.8% in October, and 0.2% in November, a three-month annualized pace of close to 9%. The late-2025 trajectory of these two measures, which offer a decent proxy for the equipment component of the fixed business investment component of GDP, offers hope for broad gains in 2026.
Conclusion
In 2026, I look for the frenzy related to AI to continue. It seems that we are still quite early in the buildout, so additional heavy outlays in the technology space seem quite likely. I am optimistic that strength in business investment will broaden in 2026, as firms in a wider array of sectors move off of the sideline and act on their long-term strategies. The result for this year could be, aside from the post-COVID rebound in 2022, the sharpest growth in real business fixed investment in over a decade. This, in turn, is the primary catalyst for my well-above-consensus real GDP growth projection for this year.
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