Business investment is up

Business investment Investment is spending that helps grow the long-term productive capacity of the economy and, as such, is the most important sector for understanding an economy’s potential. One of the challenges of higher interest rates is that while high rates help rein in inflation in the short term by bringing down demand, they can paradoxically cause inflationary pressures to persist for longer by making it more expensive for firms to invest in the capacity to produce more and relieve supply pressures. The average corporate borrowing rate shot up to nearly 7% by the end of 2023, up from a low of 2.3% in 2020. On the bright side, in the first quarter of 2024, the cost of borrowing fell to an average of 6.6% and is predicted to continue declining throughout most of 2024. As a result, although we predict growth in business investment to slow overall in 2024 compared to 2023, average growth for this year is expected to come in at 3% and is predicted to rise further in the medium term. Like all countries, the United States will have to face the challenges caused by rapidly changing climate conditions. Some of these challenges are from a higher prevalence of extreme weather events such as hurricanes and drought, which lead to loss of life and property from flooding, wildfires, and damage to farmland. Other challenges are related to the need for increased economic investment to prevent even worse effects of warming going forward. After falling almost 0.3% in 2023, the forecast shows spending on machinery and equipment rising 1.3% this year and 2.7% in 2025. Machinery and equipment expenditures have rebounded to their pre-pandemic levels but have plateaued there. This type of spending—which captures everything from plant machinery to computers and software—typically has had a strong upward trend over time, and we expect that strong trend growth to return by mid-2025. Investment in structures, which includes both buildings and engineering structures such as power plants and oil platforms, has typically been much more cyclical. Spending here is driven by commodity price booms and economic cycles. Although on the rise since the last quarter of 2022, investment in structures remains below its pre-pandemic peak, which in turn is below the all-time peak in 2008. We expect structures investment to continue rising, growing by 4.2% this year and by a further 1.6% in 2025. However, some sectors are seeing strong investment in structures, while others are facing declines. Mining structures investment is expected to be strong due to elevated oil prices, especially if geopolitical upheaval increases. Likewise, legislation such as the Inflation Reduction Act and the CHIPS and Science Act will likely incentivize investment in manufacturing structures. On the other hand, the outlook for the office segment of the commercial real estate market remains under stress. With office space prices down and vacancy rates up, the office market is likely to remain in a rebalancing phase over the near term, although the prospects for the office market will differ across metro areas.10 The final major category of business investment is investment in intellectual property, which includes software purchases and research and development spending. Investments in intellectual property increased significantly during the pandemic, especially in software, as firms scrambled to adapt to new remote work realities. Although we expect growth in intellectual property investments to slow from pandemic-era gains, we forecast growth to remain elevated and continue to be the largest driver of growth in business investments overall as many sectors incorporate the use of AI and other technologies.