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Business spending as a share of the U.S. economy has been relatively steady since the 1940s, but it\u2019s undergone a total transformation in recent years, according to Wells Fargo.<\/p>\n
Going back eight decades, investment has been between 10% and 15% of GDP and grew at an average annually rate of 5% in recent years, economists Shannon Seery Grein and Tim Quinlan said in a note Wednesday, calling the top-line numbers a \u201cfa\u00e7ade of plainness.\u201d But there\u2019s more to the story.<\/p>\n
\u201cIn short, the composition of business spending has undergone a quiet revolution,\u201d Wells Fargo said. \u201cThe term \u2018capex\u2019 used to conjure images of heavy machinery and equipment. That is being replaced with generative AI and software.\u201d<\/p>\n
In the 1990s, equipment comprised more the half of capital expenditures, the bank said. But in the 20 years after that, equipment\u2019s share of spending declined while the share going toward intellectual property climbed. <\/p>\n
Investment in \u201cintellectual property products\u201d (IPP)\u2014which includes software, R&D as well as entertainment, literary and artistic content\u2014now makes up the biggest slice and accounts for nearly all the growth in the current cycle.<\/p>\n
\u201cWhat was once an afterthought for businesses calibrating investment dollars has become the primary source of investment,\u201d Wells Fargo said. \u201cThese shifting priorities to software over physical capital have weighed on purchases of equipment and dented overall manufacturing activity in recent years.\u201d<\/p>\n
In fact, the Institute for Supply Management\u2019s manufacturing index has been anemic for months, and a surprisingly weak reading earlier this month triggered fears the economy may be headed for a recession and a global stock bloodbath<\/a>.<\/p>\n But looking at just the manufacturing side leaves out strength elsewhere. In the last five years, IPP spending jumped more than 30%, while equipment spending was essentially flat, according to Wells Fargo.<\/p>\n The trend predates the artificial intelligence<\/a> frenzy sparked by OpenAI\u2019s ChatGPT in 2022 and even the pandemic. But the current spending wave is the fastest since the tech-fueled boom in the mid-1990s, the economists said. <\/p>\n \u201cEven as IPP outlays were gaining momentum ahead of the pandemic, growth has been turbocharged recently,\u201d the bank added.<\/p>\n And within IPP, software spending in particular stands out. Last quarter, it was nearly 60% above pre-pandemic levels and is currently running more than three times\u00a0faster than R&D, which has been eclipsed by software as the largest category in recent years.<\/p>\n