US corporate capital expenditure intentions are rebounding from a low base, meaning the marginal drag from further rate hikes on economic growth may prove smaller than historical experience would suggest.

In a recent report, UBS noted that US corporate investment has endured a prolonged period of weakness, with the current starting point for capital expenditure notably lower than in past cycles. Against this backdrop, even if interest rates continue to rise, the room for additional suppression of corporate investment may be limited.

At the same time, AI investment remains the primary pillar of US capital expenditure growth. Over the past eight quarters, AI-related investment grew 26% year on year; but more noteworthy is that, after stripping out AI, corporate capex intentions have also begun to recover, suggesting that signs of investment stabilization may be spreading from the technology sector to the broader corporate sector.

UBS believes that pent-up maintenance and upgrade demand accumulated during the long downturn, ample corporate operating cash flow, and the possibility of AI demand diffusing into other industries could all provide support for a capex recovery. This means that judging the impact of tightening policy cannot rely solely on the level of interest rates; it also requires observing the marginal changes in corporate investment.

Traditional investment has been weak for a sustained period, and the room for rate shocks may be narrowing

According to the rule of thumb from the Federal Reserve's FRBUS model, every 100 basis point increase in interest rates reduces economic growth by roughly 60 basis points in the first year, with a cumulative drag of up to 150 basis points over two years. This is also an important basis for the market in assessing the impact of further tightening.

But UBS points out that what makes this cycle different is that corporate investment is not entering a tightening phase from a high level.

Over the past eight quarters, US private nonresidential fixed investment grew by an average of only 0.1% year on year, far below the long-term average of 3.2%; residential investment fell by an average of 2.0% year on year, also clearly below the long-term average of 2.2%. Outside of the technology sector, traditional US investment has been persistently weak for at least two years.

Therefore, with investment itself already at a low level, further rate increases will still create constraints, but the room to push corporate spending even lower may have shrunk. The rate shock reflected in the FRBUS model has not become ineffective; it is simply that the healthier investment starting point of historical periods differs markedly from the current situation.

Non-AI capex intentions are recovering, and investment is showing an early turning point

AI remains the strongest source of growth in current US capital expenditure. Over the past eight quarters, AI-related investment grew 26% year on year, indicating that US corporate investment is not contracting across the board but is instead highly concentrated in the AI sector.

However, UBS observed that capex intentions in non-AI areas are also beginning to improve.

UBS aggregated capital expenditure intention indicators from 14 regional Federal Reserve manufacturing and services surveys and took their median. After falling in April 2025 to the 3rd-lowest percentile on record, the indicator had rebounded to the 36th percentile by August 2026.

This level is still not high, but the direction has changed. Historical data show that each 1-point rise in the indicator equates to roughly 1.2 standard deviations, typically corresponding to about a 5.5 percentage point increase in capex growth. Although intentions are not the same as actual spending, they usually lead changes in capital expenditure.

UBS also adjusted fixed capital investment to strip out AI factors, removing five categories of AI-related investment in total. However, the "non-AI" measure may still include some AI spending, so this change is better understood as a stabilization signal in non-technology investment rather than evidence that the AI effect has been fully excluded.

Replacement demand and ample cash flow support a capex recovery

One practical reason for the rebound in capex intentions may be that previously deferred maintenance and upgrade demand is beginning to be released. After non-technology investment remained weak for at least two years, some companies may no longer be able to keep postponing equipment and facility upgrades, so the recent capex rebound does not necessarily signal a broad expansion; it may first reflect the restart of essential spending.

Corporate cash flow provides the funding base. Operating cash flow rose by US$825 billion year on year, an increase of 25%; at the same time, excluding hyperscalers, capital expenditure as a share of operating cash flow remains near historic lows.

This means companies are not short of funds; rather, they had previously not converted more cash flow into investment spending. If capex intentions continue to recover, ample internal cash flow is expected to reduce companies' reliance on external financing and weaken the direct constraints of high interest rates on corporate investment.

In addition, if demand for AI infrastructure, software and automation continues to spread into non-technology industries, the capex recovery could broaden further. Current data are not yet sufficient to prove that this trend has fully taken shape, but the rebound in non-AI investment intentions from historically extremely low levels has already sent an early signal worth watching.