Thoughts

August 29, 2025 | 13:55

Why Is U.S. Business Investment So Strong?

Economist

Senior Economist and Director
Economics

Sal Guatieri is a Senior Economist and Director at BMO Capital Markets, with over two decades experience as a ma... (Read more)

Sal Guatieri

Senior Economist and Director
Economics

Sal Guatieri is a Senior Economist and Director at BMO Capital Markets, with over two decades experience as a ma... (Read more)

One of the biggest economic surprises this year is the resilience of American business investment in the face of a trade war. Unlike households, which pulled back in the first half, businesses ramped up spending. True, the double-digit jump in nonresidential investment in Q1 largely owed to tariff front-running, as imports also surged. But less easily explained is that investment growth remained strong in Q2, with a 5.7% annualized advance implying little payback. Investment would have been even stronger if not for a big drop in structures spending in the volatile resource sector. In fact, business spending on industrial machinery, transportation equipment, and software all sped up last quarter. A 26% annualized surge in software demand—the fastest in 22 years and unrelated to tariff front-loading—added 0.6 ppts to GDP growth.

Moreover, this strength likely continued in the summer. In July, factories ordered more machinery, computers, and metal products, lifting nondefense capital goods orders (excluding aircraft) a solid 1.1%. Likewise, nondefense capital goods shipments, which the BEA uses to estimate quarterly business equipment spending, jumped 3.3%. As well, capital goods imports picked up. Importantly, all this occurred despite increased tariffs and trade tensions last month.

Why so strong? For one, businesses are spending vast sums to develop and adopt AI. Investment in IT equipment and software surged 15.2% in the past year—seven times faster than real GDP (Chart 1). Four corporate giants alone (Meta, Amazon, Alphabet, and Microsoft) plan to spend about $320 billion this year on AI technologies and data centres, up from $230 billion last year. Total spending on data centres, largely to support AI systems, is up 28% year-over-year to June and looks to surpass spending on office buildings. Tech firms also plan to spend hundreds of billions of dollars on microchip production and AI-related infrastructure.

But it’s not just about AI. Other drivers of U.S. business investment include:

Tariffs (yes, tariffs), which are likely spurring some reshoring of manufacturing, thereby boosting investment spending despite the uncertainty.
The federal government’s business-friendly policies, including lighter regulation and accelerated depreciation allowances on investments.
Strong corporate earnings growth, reflecting decent productivity gains and relatively resilient (albeit slower) consumer spending.
Robust foreign direct investment in the U.S.

The upshot is that U.S. business investment is not only exceeding low expectations this year but vastly surpassing them—and might continue to do so, especially if trade policies stabilize. Given the sector’s meaningful 14% share of GDP, this implies some upside for growth in the second half of the year.