The Big Idea
Business investment broadens
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US GDP in the first quarter this year relied almost exclusively on capital expenditures driven by the AI boom. And preliminary numbers for the second quarter show another torrid round of investment. But the strength in the second quarter broadened well beyond the tech sector, suggesting that the long-awaited revival in non-AI investment may have commenced. Business investment in tech and beyond should push real GDP growth well above trend.
Breakdown of business fixed investment
In the GDP accounts, business fixed investment falls into three main components: structures, equipment, and intellectual property. Structures, the smallest of the three, has been sliding in real terms since the beginning of 2024. In contrast, outlays for equipment and intellectual property posted solid gains last year and accelerated further in the first half of 2026.
The increases since the start of 2025 have been narrowly focused. In fact, in four of the five quarters from the beginning of 2025 through the first quarter of this year, 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.
Not all technology outlays since the start of 2025 were directly related to AI, but presumably most were. Firms have gone on a binge of acquiring computer hardware and software in support of the AI buildout. The first quarter real GDP figures represented an extreme example, with computer hardware and software rising at more than an annualized 30%. Meanwhile, for the fourth time in five quarters, spending for “everything else,” which includes structures, equipment aside from computers and accessories, and research and development outlays declined (though R&D outlays for software are included in R&D, not the software line item).
As I have laid out in a number of pieces over the last year or so, the tepid performance for non-AI investment last year and in early 2026 looked driven primarily by uncertainty regarding the policy outlook, most notably the unpredictable tariff situation. As firms gain a clearer sense of the general direction of tariff policy, I have expected investment appetite to improve more broadly. The underlying investment landscape benefits from substantial tax changes enacted last year, such as the reinstatement of full expensing for investment and of the R&D 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.
The second quarter GDP data finally offer some support for that hypothesis. Outlays in the tech space moderated last quarter, especially relative to the explosive first quarter. However, spending on traditional equipment and R&D accelerated noticeably. The gain in the “everything else” category of $37 billion works out to a 7.2% annualized pace, and that includes the 5.0% annualized slide in real terms in the structures category.
It looks like some of the activity that had been delayed for several quarters as businesses waited for greater policy clarity was unleashed in the spring. Earlier this year, I worried that the conflict in the Middle East might chase businesses back to the sidelines again, but the survey, anecdotal, and statistical evidence have all been consistent that firms were largely undeterred by the geopolitical uncertainty.
More positive signs
The monthly data suggest that the vigor in business investment is likely to continue into the second half of the year. Core capital goods shipments, a good proxy for the quarterly business investment in equipment tally, posted a 1.9% surge in June, the largest monthly gain since 2021. The six-month annualized rate of advance for core capital goods shipments, which has been steadily firming for two years and reached 11% in June, nearing the steepest gains recorded during the Covid reopening period in 2021 and 2022 (Exhibit 2).
Exhibit 2: Core capital goods shipments
Source: Census Bureau.
Meanwhile, core capital goods orders, which offer a more forward-looking perspective, show an impressive surge (Exhibit 3). This gauge has registered monthly rises of 0.9% or better in five of the past six months. The resulting six-month annualized advance exceeded 15% in March, May and June, the largest advances since the initial phase of Covid reopening in late 2020 and early 2021.
Exhibit 3: Core capital goods orders
Source: Census Bureau.
The unusually consistent and robust gains in core capital goods orders and shipments in the first half of 2026 support the idea that businesses have moved past the period of uncertainty that delayed their investment decisions last year and are now prepared to make up for lost time. This should be coupled with an ongoing robust AI buildout that shows few signs of winding down any time soon. Indeed, recent second quarter earnings announcements by several of the largest technology corporations confirm that the rapid uptrend in AI-related outlays is likely to continue for a while. It looks like business investment could post broad-based and robust increases for the foreseeable future. In my view, this should propel real GDP growth well above trend in the second half of this year and into 2027.
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