The share of corporate spending in the U.S. economy has remained relatively stable since the 1940s, but has undergone a complete transformation in recent years, according to Wells Fargo.
Over the past eight decades, investment has been between 10 and 15 percent of GDP and has grown by an average of 5 percent annually in recent years, economists Shannon Seery Grein and Tim Quinlan said in a note on Wednesday. They called the figures a “facade of simplicity.” But there is more to the story.
“In short, the composition of corporate spending has undergone a quiet revolution,” Wells Fargo said. “The term ‘capex’ used to conjure up images of heavy machinery and equipment. These are being replaced by generative AI and software.”
In the 1990s, more than half of capital spending went to equipment, according to the bank. But over the next 20 years, the share of equipment in spending fell while the share of intellectual property rose.
Investments in intellectual property products (IPP) – which include software, R&D, and entertainment, literary, and art content – now account for the largest share and are responsible for almost all growth in the current cycle.
“What was once a secondary consideration for companies when calculating their capital expenditures is now the primary source of capital expenditures,” says Wells Fargo. “This shift in priorities from physical capital to software has negatively impacted equipment purchases in recent years and has impacted overall manufacturing activity.”
In fact, the Institute for Supply Management’s manufacturing index has been weak for months, and a surprisingly weak reading earlier this month sparked fears that the economy could be heading for a recession and a global stock market bloodbath.
But looking only at the manufacturing side ignores strengths in other areas. Over the past five years, IPP spending has increased by more than 30 percent, while spending on equipment has remained essentially flat, according to Wells Fargo.
The trend goes back to the artificial intelligence The hype sparked by OpenAI’s ChatGPT in 2022 and even the pandemic. But the current wave of spending is the fastest since the technology-driven boom of the mid-1990s, the economists said.
“Although IPP spending was gaining momentum even before the pandemic, growth has been boosted strongly recently,” the bank added.
And within the IPP, spending on software in particular stands out. Last quarter, it was almost 60% above pre-pandemic levels and is currently running more than three times faster than research and development spending, which in recent years has been eclipsed by software as the largest category.
In fact, technology giants such as Microsoft, Alphabet and Meta, which are investing heavily in AI, signaled that they will continue to pump billions into spaceThe trio spent a total of $40.5 billion in the second quarter on the infrastructure, land and chips that power their AI services, and each company hinted that those numbers will only get higher next year.
According to Wells Fargo, aggressive software investments are an early sign of artificial intelligence adoption and could lead to productivity gains.
Outside the IPP, companies also invest in other technology-related areas, such as high-tech facilities and information processing equipment.
“There is no guarantee that this technology-focused spending will trigger a productivity boom, but to the extent that it does, it would be good for growth,” the economists said. “Productivity can raise living standards and real incomes, which can boost consumption and increase profits.”