Is the Tax Cut Investment Boom Already Over?

Is the Tax Cut Investment Boom Already Over?


Kevin Hassett, chair of President's Trump's Council of Economic Advisers, defended the Republican tax bill in an interview with CNN's Poppy Harlow Wednesday, saying that the promised wave of investment by American businesses in response to the tax overhaul was on track. "There has been a capital spending boom this year," Hassett said, and the pattern of investment is “exactly what our models would predict.” But the boom appears to have been faded quickly, Harlow said, citing a sharp slowdown in business investment growth in the third quarter of 2018.

In a report cited by CNN titled “The investment boom that wasn’t,” Bank of America’s Ethan Harris wrote, “It now appears the investment recovery was short-lived.” Overall, "There hasn't been a huge surge in response to tax reform," said University of Chicago business professor Eric Zwick. And moving forward, "We're not going to get the huge boom that proponents of the tax cut were discussing," said Gus Faucher, chief economist at PNC.

By contrast, the tax cuts had a more significant effect on stock buybacks, which hit record levels as companies dispersed a windfall created by lower tax rates and the repatriation of profits held overseas. “While government statistics show that nominal fixed business investment increased just 8.2% through the first three quarters of 2018,” CNN’s Matt Egan wrote, “announced stock buybacks surged by 71% in 2018 to a record $1.04 trillion, according to TrimTabs Investment Research.”

The rapid demise of the investment boom comes as no surprise to analysts like Ian Shepherdson, chief economist at Pantheon Macroeconomics, who like many critics of the GOP tax cuts said that companies had plenty of cash on hand before the tax law passed, and that simply giving them more money wouldn’t necessarily inspire additional investment. "History shows that repatriated earnings tend to be spent on buybacks and dividends,” Shepherdson told CNN. He added that he saw "no evidence at all" that the tax cuts directly influenced business investment last year.

One factor that probably did play a role in the jump in business investment at the start of 2018 was oil. A recent study from Wharton found that U.S. business spending is now strongly correlated with higher oil prices, and oil prices rose sharply last year. Wharton’s Alexander Arnon said that “oil prices might even account for most of the increase in the growth rate of investment in 2018.”