When Congress passed the biggest change in the U.S. tax code in thirty years, taxes were cut by $1.5 Trillion. The promise was that U.S. industry would invest that money, hire more people, and raise yearly GDP growth to the 4% range for the indefinite future. That did not all seem to have happened according to recent information. Was the Trump tax cut a bust for investment and hiring? Here are some thoughts on the subject.
Trump Tax Cut a Bust for Investment and Hiring
Fortune explains why the tax cut has not sparked hiring or investment.
The Trump administration’s $1.5 trillion in tax cuts appears to have not made any major impact on businesses’ capital investment or hiring plans, according to a new survey.
A quarterly poll from the National Association for Business Economics published Monday found that some companies reported accelerating investments because of lower corporate taxes, but a whopping 84% of respondents said they had not changed their plans. That’s up slightly from 81% in the previous survey published in October, Reuters reports.
The one bright spot was in goods-producing companies where half reported increased investments and a fifth reported redirecting hiring and investments from offshore to the USA.
Of S&P 500 companies studied by the University of Michigan, only 4% planned to give back part of the tax cut to workers and a fifth anticipated increasing their business-related investments. Small business investment fared better according to the National Federation of Independent Business with 5% increasing their investments while a third increased employee pay.
Market Watch is bit more cynical, saying that Trump tax cuts were a bust!
President Trump proclaimed: “It’ll be fantastic for the middle-income people and for jobs, most of all. I think we could go to 4%, 5% or even 6% [GDP growth], ultimately. We are back. We are really going to start to rock.”
A year later, it’s very clear that the tax cuts boosted gross domestic product and jobs a bit – and just for one year. Its effects are fading as U.S. GDP growth appears likely to weaken in 2019. The only things that “rocked” were corporate profits and the stock market. And we’re facing trillion-dollar deficits as far as the eye can see.
They report that the increased investment that did occur went primarily to technology and intellectual capital and less to new structures and equipment. So, where did all of that money go?
Trump Tax Cuts and Share Buy-backs
Where the money seems to have gone is to buy back shares of stock! Market Watch goes on to say that the end result was to prop up the stock market.
Companies actually spent more on buybacks than on capital investments in 2018’s first half, and remember, capex weakened as the year went on. Buybacks shrink the number of shares, boosting earnings per share and eventually, the stock price. That helps all shareholders, of course, but especially corporate executives, more than half of whose total compensation is in stock.
What has happened is that company profits have done very well and by buying back their stock, companies have preserved and increased their share prices. Employment has increased but barely at all in the manufacturing sector when Trump promised. Most of the new jobs are in the professional and business services areas as well as in health care. Meanwhile the country has shouldered an additional $1.5 Trillion in debt and likely see the GDP fall back to 2% this year!
The repatriation of offshore corporate profits was strong at the beginning of 2018 and has fallen off ever since. Thus, the huge boom from offshore cash has not really happened.
Trump Tax Cut Sugar High
Bloomberg is also negative in regard about the Trump tax cuts.
They note that wage growth in 2018 was primarily a result of the temporary economic stimulus caused by the tax cuts and will level off or fall as the tax cut economic benefits fade!
In other words, the most desired effect of Trump’s corporate tax cuts is very hard to find in the available data. So far, what we’re seeing is probably a sugar high driven by deficit spending. That’s not terrible, and could even undo some of the damage done by the last recession. But it’s not what the tax cuts are really supposed to achieve.
What Is in Store for Investors in 2019?
Investors in the stock market were prime beneficiaries of the Trump tax cut because companies pumped their tax savings into share repurchases. It is of note that so many corporate executives have stock options as a large part of their payment packages. This, of course, makes suspect the practice of buying back shares to prop up stock prices instead of expanding their businesses and hiring more workers.
Unfortunately, the short term sugar high of the tax cuts will wear off. The trade war could become permanent with long term damage to sectors like agriculture. We wrote recently about investments to choose right now. There is less of a problem if you are using intrinsic stock value as a guide and investing for the long term. There is more of an issue if you are looking for short term gains at a time when the tech stocks that previously led the markets seem to be weakening.
Canary in the Coal Mine?
Industry Week writes that chipmakers may be harbingers of things to come in tech.
Investors in Intel Corp. were unpleasantly surprised by the computer-chip company’s forecast for relatively flat revenue and profit margins for 2019. Fellow chipmaker Nvidia added to the dour news on Jan. 28 by cutting its expected revenue.
Well before these disappointments, however, the U.S. internet superpowers had already hinted at the chipmakers’ meek results. The chipmakers may, in turn, be sending warning signs about slipping growth for the tech powers.
Intel said last week that the biggest customers for its computer server chips – titans such as Amazon, Google, Microsoft Corp. and Alibaba – were “absorbing capacity” from their stockpiles of previous orders and would, therefore, most likely hold off on buying more chips for a few months.
When these companies see leaner times ahead, they will start looking for ways to save money. In the case of tech firms, cutting back on chip orders is at the base of the economic pyramid. We agree that reduced orders for chips could be compared to the canary no longer singing down in the mine shaft. Investors will want to pay attention.