The U.S. economy has been growing above potential since 2022—a four-and-a-half-year run of 2% or more annual growth exceeding the long-term 1.8% rate.
And perhaps more important, the economy has been operating at full employment, with the jobless rate held within a range of 3.5% to 4.3% over that same time span.
Despite a challenging growth picture during the first half of this year, we still expect an above-trend growth rate of 2.1% for this year and a rate between 2.5% and 3% in the current quarter.
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While a good portion of that growth is driven by the historically strong condition of upper-end consumers and a robust equity market, the other major factor is the AI-led boom in nonresidential investment.
While a narrowing of the trade deficit and revival of the domestic manufacturing sector have received policy focus over the past two years, that is not what is driving American growth now.
Manufacturing, after all, has lost 35,000 jobs since the beginning of 2025. Instead, the economy’s recent strength can be traced to the investments in productivity that originated out of necessity during the pandemic.
Since the second quarter of 2020, during the depths of the pandemic, total nonresidential investment has grown from an annualized level of $2.7 trillion to $4.6 trillion in the second quarter of this year.
Nonresidential investment comprises 14.3% of the total U.S. economy. It’s fair to say that nonresidential investment growing at a 9.1% average annual rate is symptomatic of this latest era of technology advances and economic growth.
The result over the medium to long term will be an improved pace of productivity, faster growth and higher wages. But in the near term, it will result in a draw on resources to support the AI buildout.
That surge in investment will cause inflation to increase and require higher rates out of the central bank.
The three major components of nonresidential investment are:
- Intellectual property, also growing at a 9.1% average annual rate since the second quarter of 2020.
- Equipment, which includes computer equipment, growing at a 10.5% yearly rate.
- Structures, growing at a yearly rate of 6.5%.
The latest upsurge in investment is likely because of the maturation of artificial intelligence, with technology once more bolstering productivity and economic growth.
Even if this period is not the first investment boom in recent decades, it is the strongest. The 9.1% yearly growth rate of nonresidential investment has surpassed the introduction of personal computing during the second half of the 1990s. It has also exceeded the upswings in investment during the recoveries from the 2001 and 2009 recessions.
We should also note that investment in structures, the third major component of nonresidential investment, picked up after the pandemic, but looks to have peaked in 2024.
Nevertheless, investment in structures has increased at an average 6.5% yearly rate since the second quarter of 2020. That is a robust rate of investment but highlights the shift in this next stage of the modern American economy.
Investments in intellectual property
Investments in intellectual property now account for 42% of total nonresidential investment.
Those investments are roughly divided between research and development growing at 9.3% per year and software purchases growing at 9.6% a year since June 2020.
More than anything, the growth of capital allocated to R&D points to the technological advances that began in the space-age era and the likelihood of sustained advances going forward.
We think that the age of AI will lead to a sustained boom in intellectual property-driven nonresidential investment.
Investments in equipment
Investments in equipment account for 40% of total nonresidential investments. Equipment purchases have increased at an average rate of 10.5% per year since the pandemic, with investment in information-processing equipment accounting for 42% of that growth.
Investments in computers and peripherals have increased by 21.1% each year compared with the robust investment in industrial equipment and its growth of 8.5% per year, and in transportation equipment, growing at a 12.6% yearly rate.
The takeaway
The nonresidential investments in intellectual property and technological equipment since the pandemic have not hurt the labor market, as seen in the low rates of unemployment during the economy’s recovery from the pandemic.
On the contrary, investments in technology have created opportunities for the economy and the labor market.
We point to investment in intellectual property and equipment that far exceeds investment in structures during the post-pandemic era, all of which characterizes the latest transformation of the modern U.S. economy.
While the necessities of the pandemic era were the major drivers of the recent improvement in productivity, we think that the economy’s transformation around AI will lift not just productivity but total factor productivity.
For now, however, the draw on resources to support that transformation will drive inflation higher and require higher interest rates out of the Federal Reserve.
