Business Investment: A Shift from Machinery to AI
A quiet revolution is transforming business investment, according to a recent analysis by Wells Fargo. Historically, capital expenditure (capex) invoked images of heavy machinery and equipment. However, today, businesses are increasingly channelling funds into generative AI and software.
Historical Perspective on Business Spending
For decades, business spending as a percentage of the U.S. economy has remained relatively consistent, ranging from 10% to 15% of GDP. Despite this stability in overall numbers, the composition of these investments has evolved significantly. Equipment once dominated capital expenditure in the 1990s, but over the past two decades, its share has diminished. In contrast, investment in intellectual property products (IPP), such as software and R&D, has surged, driving growth in recent cycles.
Intellectual Property Takes the Lead
IPP now constitutes the largest segment of business spending. This shift reflects a change in priorities where intellectual capital outpaces physical capital. As businesses allocate more towards software development and R&D, purchases of traditional equipment have declined, impacting manufacturing activity.
Economic Indicators and Trends
The Institute for Supply Management’s manufacturing index has shown weak performance in recent months, raising concerns of potential economic recession. Despite this, IPP spending has increased dramatically, over 30% in the last five years, while equipment spending remained flat. This trend predates the surge in interest around artificial intelligence, sparked by innovations like ChatGPT.
The Role of Software in Business Growth
Software spending is a significant growth driver within IPP, with recent levels nearly 60% higher than pre-pandemic figures. Notable tech companies like Microsoft, Alphabet, and Meta are heavily investing in AI, spending billions on infrastructure and technology to support AI services. Such investments are early indicators of AI adoption, potentially leading to improved productivity across industries.
Broader Tech Investments
Beyond IPP, businesses are also increasing investments in other technology-related areas, including high-tech facilities and information processing equipment. These investments highlight a broader trend towards a tech-focused economy.
Potential Impacts on Productivity and Growth
While there is no guarantee that tech-focused expenditures will result in a productivity boom, the potential benefits are substantial. Increased productivity can enhance living standards and real incomes, fostering consumer spending and boosting corporate profits. Wells Fargo suggests that this shift in business investment may ultimately support economic growth.
