The Big Idea
AI buildout accelerates
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Business investment in the first three quarters of last year came entirely from technology outlays while spending on all other types of capital goods and services declined. Since then, the economic data point to an accelerating AI boom that is propelling business spending in particular and economic growth more broadly so far in 2026.
Breakdown of business fixed investment
In the GDP accounts, business fixed investment is divided into three main components: structures, equipment, and intellectual property. The structures piece, the smallest of the three, has been sliding in real terms for nine consecutive quarters going back to the beginning of 2024. In contrast, outlays for equipment and intellectual property posted solid gains last year.
Those increases, however, were narrowly focused. In fact, in four of the past quarters, the “information processing equipment” line item within equipment and the “software” line item within intellectual property more than accounted for the overall rise in real business investment (Exhibit 1).
Exhibit 1: Real business fixed investment quarterly changes
Source: BEA.
To be sure, not all technology outlays since the start of 2025 were directly related to AI, but it is safe to assume that most of them were. Firms have gone on a binge of acquiring computer hardware and software in support of the AI buildout. The first quarter GDP figures released on April 30 make clear that this spending spree is still gathering speed, as both the IP equipment and software categories posted massive rises.
The flip side of the AI-related strength is the lack of growth for more old-fashioned investment goods, like buildings, industrial equipment and so on. In my view, the tepid performance for non-AI investment last year and in early 2026 was driven primarily by uncertainty regarding the policy outlook, most notably the unpredictable tariffs situation. As firms gain a clearer sense of the general direction of tariffs policy, I would expect investment appetite to improve more broadly. The underlying atmosphere benefits from substantial tax changes enacted last year, such as the reinstatement of full expensing for investment and of the research and development tax credit, and a vigorous push toward deregulation in a variety of industries, including banking and finance. This combination of policy changes produced a similar, albeit short-lived, burst in business investment in late 2017 and early 2018, so there is empirical backing for such a response.
Having said that, the uncertainty generated by the Middle East conflict, particularly the lack of clarity regarding the path of energy prices, offers another reason for business executives who have been cautiously delaying their investment plans to continue holding off, in hopes that the hostilities will end in a few months and the outlook for energy prices will clear up.
Positive signs
One could look at business fixed investment and notice that technology investment was quite strong in the first quarter of 2025 and then moderated in subsequent quarters. Was the pop in the first quarter of this year just a one-off? Here, the monthly data offer further reason for optimism.
The March durable goods report released on April 29 revealed explosive gains in February and March for core capital goods shipments, a decent proxy for the equipment component within the GDP accounts. The monthly increases in February and March were 1.3% and 1.2%, respectively—and these are not annualized figures. Notice the six-month annualized rate of advance for core capital goods shipments approaching 10% (Exhibit 2).
Exhibit 2: Core capital goods shipments
Source: Census Bureau.
Since September, the monthly advances have been 0.8% or higher in five of the last seven months after the measure posted anemic growth in the first two thirds of last year.
There has also been an impressive surge in core capital goods orders, which represent a more forward-looking perspective (Exhibit 3). After posting six straight monthly increases of ½% or better to end 2025, core capital goods orders dipped by 0.3% in January. However, they rebounded violently, posting gains of 1.6% in February and 3.3% in March. The latter was the largest monthly rise since June 2020. The resulting six-month annualized advance of more than 14% was also the strongest since the post-pandemic reopening period.
Exhibit 3: Core capital goods orders
Source: Census Bureau.
The blowout gains in core capital goods orders in February and March point to a continuation of the outsized real business fixed investment growth seen in the first quarter. Indeed, recent first quarter earnings announcements by several of the mega technology corporations confirms that the rapid uptrend in AI-related outlays is likely to continue for a while. Moreover, if the policy and geopolitical outlooks ever clear up by enough to entice a broadening of investment activity, then the sector may drive a sharply stronger-than-consensus pace of real GDP growth, as I expect for 2026 and perhaps 2027 as well.
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