Business investment trends post COVID

After declining for one quarter (Q2 2020), software investment grew at an average annual rate of 14%, compared to 9% in the four years before the pandemic. Of course, any computer engineer knows that software investment is an important counterpart to investment in equipment; all those new computers and servers are only as valuable as the software running on them. Software investment was already growing fast, but the need to jump to remote work has pushed businesses to invest even more in software.

Investment in research and development (R&D) also showed an acceleration after the initial pandemic-caused decline, from an average rate of 5.3% before the pandemic hit in the first half of 2020 to 9.8% after. R&D (like software) may be less affected by the need to work remotely. Plus, the need for R&D may have grown—R&D is necessary to find new ways for businesses to operate and new products and services that solve problems in the changed economy.

Investment in artistic originals, a relatively small portion of intellectual property (about 9%), has failed to return to the prepandemic level. Much of that category relates to movies and television shows, which have found production challenging in the postpandemic environment. This weakness—while disappointing for consumers of entertainment, not to mention the artists involved—will not have a large impact on future economic production.

New investment patterns reflect the new economy

The rush to purchase goods rather than services, the move to remote work, and the increasing popularity of online shopping are upending past business models. The economy is changing. So, it’s not surprising that patterns of business investment are changing to reflect those fundamental shifts.

Changing patterns of investment will make past benchmarks for business and the economy less useful. For example, the increased share of investment in equipment and intellectual property at the expense of buildings will raise the depreciation rate of capital. Equipment (especially information-processing equipment) and intellectual property (especially software) lose market value much more quickly than longer-lived structures. Businesses with a larger share of capital invested in equipment and software will likely post faster depreciation rates for their plant and equipment (depending on the relationship between “economic” or actual capital depreciation, and accounting and tax concepts).² It may also be necessary to write off current capital, which is no longer as valuable as it was in the past.

The changed investment patterns will also mean the substitution of people for things. The capital input for intellectual property investment tends to be lower than that for machinery or buildings, so the demand for capital may remain lower than expected for a given level of total investment. That could help put a lid on interest rates, which, ultimately, reflects the supply and demand for capital.

The “new economy” is a phrase that comes up every so often in economic history. It’s time to dust it off again: A “new economy” is a good description of the business adjustment to the postpandemic world.