Macro Signposts | 30 July 2025

U.S. Economy: Investment Momentum Meets Policy Uncertainty

Recent U.S. trade deals with Europe and Japan have drawn headlines for their scale and symbolism. Both partners agreed to 15% tariffs - lower than those originally threatened by the Trump administration, but higher than the 10% currently applied - in exchange for sweeping investment pledges: $550 billion from Japan in loans and guarantees, and $600 billion in European foreign direct investment, plus $750 billion in European energy purchase agreements. These commitments underscore the strategic importance of the U.S. as a destination for capital, particularly in technology and energy sectors.

But the benefits to the U.S. economy remain uncertain. None of the pledges are legally binding. Their realization depends largely on political will and enforcement through the risk of higher tariffs.

More fundamentally, the U.S.'s ability to convert these commitments into actual investment - and long-term productivity gains - will hinge on its success in attracting capital to national-security-sensitive sectors such as semiconductors, AI, and energy. U.S. industrial policies since the pandemic have the country well-positioned to capture global investments in these areas. Since the pandemic, U.S. investment and productivity have generally outpaced OECD peers - and may continue to do so. However, the U.S. outlook is clouded by persistent trade policy uncertainty and structural cost disadvantages that remain despite the administration's tax and tariff policies.

Currently, outside of AI and related sectors, fixed investment in all other categories has slowed to a halt. Second quarter real GDP data are a case in point: AI-related investments, including R&D and computers and communications equipment, contributed 1 percentage point to overall real GDP growth in the first half of 2025. All other investment was slightly contractionary on net (see Figure 1).

Figure 1: Tech investments outpace all other categories combined in U.S. GDP 2025 YTD

Tech investments outpace

Source: U.S. Bureau of Economic Analysis (BEA), Haver Analytics, PIMCO calculations as of Q2 2025
*Quarterly contributions are smoothed over two quarters. Past performance is not a guarantee or a reliable indicator of future results.

Taking a step back
Since the pandemic, there has been bipartisan agreement on the need to rebuild domestic supply chains in sectors such as semiconductors, AI infrastructure, energy, healthcare, steel, and auto production. COVID-19 exposed the national security risks of relying on global production, particularly in healthcare. Yet at the same time, secular shifts in technology and energy have spurred the need for global economic transformation, requiring additional investments.

U.S. industrial policy, including government infrastructure and tax incentives for semiconductors and green energy, has helped the country capture some of these global flows. Specifically, megaprojects - those related to semiconductors in particular - have lifted manufacturing investment, despite high interest rates, contributing to U.S. outperformance in productivity relative to OECD peers.

Recent tax changes under the Trump administration, including full expensing of structures and also expensing of equipment and R&D (originally part of the 2017 Tax Cuts and Jobs Act (TCJA) and now made permanent), have broadened incentives beyond the semiconductors and green energy sectors targeted by Biden-era policies. More companies now have reason to invest in the U.S.

But timing and scale are uncertain
Several factors cloud the investment outlook:

What the data say
U.S. data confirm how resilient post-pandemic investment trends, despite higher interest rates, resulted from waves of investments in several areas. Flexible work arrangements initially spurred a boom in computer and tech investment. Semiconductor and electric vehicle production plant investments followed. More recently, AI-related spending (such as on data centers) has accelerated, even as growth in other categories has faded (see Figure 2). Now, even AI investment growth appears poised to slow, though levels will likely remain strong. For continued real GDP growth, we need a further surge in the already elevated level of ongoing AI-related capex, or a broadening out of investments through faster adoption across sectors - something that we expect will happen eventually, but isn't yet being telegraphed in the earnings calls of the major tech firms.

More concerning is the sharp decline in non-residential construction starts for multiyear investment projects over the past several quarters (see Figure 3). Without a new wave of megaprojects - beyond the major semiconductor project that drove the recent uptick - investment in structures may contract.

And herein lies the issue. U.S. investment commitments by major economies and private companies alike will need to ramp up soon to offset the lull. However, with policy uncertainty likely contributing to delayed or canceled starts, some near-term weakness could be inevitable.

Figure 2: AI contributes to more robust spending in office and data center construction

AI contributes to more robust spending

Source: Dodge Construction Network, Bloomberg, Haver Analytics, U.S. Bureau of Economic Analysis, and PIMCO calculations as of July 2025

Figure 3: Investment in manufacturing construction has tailed off

Investment in manufacturing construction

Source: Dodge Construction Network, Bloomberg, Haver Analytics, U.S. Bureau of Economic Analysis, and PIMCO calculations as of July 2025

Bottom line
We believe, the U.S. appears well-positioned to benefit from global investment in digital, energy, and supply-chain transformations in national-security-sensitive sectors. Post-pandemic productivity gains have outpaced OECD peers. Industrial policies and tax incentives should support further gains in investment, especially for capital-intensive industries.

However, trade policy uncertainty, which is likely delaying the start of nonresidential investments, is a headwind. The AI investment cycle thus far has been relatively immune to these trade policy changes. Other sectors, however, look stagnant or contractionary. Despite commitments from key trade partners, reducing trade policy uncertainty is critical to sustaining U.S. investment momentum.

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