Business investment
Businesses have ramped up investment since the initial impact of the pandemic, but they have been selective about what they are investing in.
Investment in nonresidental structures didn’t recover to the prepandemic level until the third quarter of 2022. However, structures investment picked up in late 2021, and has been growing quite quickly since then (although the third quarter showed little growth).
Mining structures investment has picked up in response to higher oil prices. The surprise here is that mining didn’t grow earlier and faster. But the more surprising contributor to growth is manufacturing structures. Recent legislation—the CHIPS and Science Act and the Inflation Reduction Act—provide significant incentives for increasing manufacturing capacity in the United States. And those incentives do seem to be creating demand for investment in manufacturing. It’s probably no surprise that the pickup in structures investment occurred after these bills became law.
Prospects in many other nonresidential building sectors remain grim. The business case for office buildings and retail space has diminished, with online shopping and the shift toward working from home. Current talk of converting office buildings to residential spaces suggests that real estate experts don’t see a lot of room for growth in office demand.
Investment in equipment has been slowing. After rising over 10% in 2021 and 4.3% in 2022, equipment investment has been slowing and, in fact, declined in three of the last four quarters (to the third quarter of 2023). Since the pandemic, equipment investment has been dominated by transportation equipment and information technology (IT) equipment. Remote work makes IT equipment (and software) a substitute for buildings, and so the counterpart to weak investment in commercial structures is a lot of investment in IT. That need was particularly strong as companies moved to more virtual work over the past few years. But now that the initial investments have been made, we are seeing a slowdown in investment in information processing equipment. Some of this weakness has been offset by continued fast growth in investment in transportation equipment.
Investment in intellectual property (which consists primarily of software and R&D) remained strong during and after the pandemic. That’s mostly because of investment in software, and it likely reflects in the investments needed for teleworking. It has slowed in recent quarters, but we expect this category to remain strong over the next few years as businesses continue to require software to accompany their investments in information processing equipment.
Future investment is likely to gradually switch back to structures in response to incentives to invest in climate change remediation. Such investment may not appear as profitable as past investment. Current methods of measuring the economy, and corporate profits, don’t correctly measure the cost of climate change, or the benefits of reducing greenhouse gas emissions.12US government policy is now pointing companies toward more investment in climate remediation, and an increasing share of business investment spending is likely to be dedicated to this goal.
Financing investment is becoming a bit pricier as long-term interest rates rise. However, many nonfinancial businesses are sitting on a pile of cash. In our baseline forecast, the AAA corporate bond rate rises to just under 6% and stays there through the end of the forecast horizon. Although that may appear high, historically it is not that high. And continuing innovation in areas like artificial intelligence will help to raise the demand for capital. On top of that, the need for investments in climate remediation may be quite costly. The International Monetary Fund estimates US$3 trillion to US$6 trillion of spending per year required through 2050.13
Between the need to refit for climate change remediation, the introduction of new technology, and investment in more robust supply chains, US businesses are likely to find plenty of uses for capital, even at interest rates that remain above the prepandemic level. Our forecast has a short-term decline in nonresidential investment spending, but after 2024, investment grows faster than GDP through the forecast horizon.
