A recent economic report suggests that a White House official’s prediction that the 2017 tax cut would fuel capital spending is starting to come true.
Reported plans for future capital investment continued their upward surge and hit an all-time high in March. Along with a concurrent increase in actual equipment spending, the figures suggest continued momentum through the second quarter of 2018, according to a March 27 report by Morgan Stanley and Co. LLC’s research wing.
Before the Tax Cuts and Jobs Act (P.L. 115-97) was enacted, Council of Economic Advisers Chair Kevin Hassett noted at a December 13 event in Washington that “the sign that we really need to see if [the tax cuts are] working is that capital spending goes up as a share of GDP next year.” He added that it would be “completely fair” to say they aren’t working as expected if capital spending drops or remains unchanged by the end of 2018.
The report observed that while the manufacturing sector is facing uncertainty in light of President Trump’s announced tariffs, “plans for future investment appear to have been unscathed in March. This may imply that tax benefits are outweighing uncertainties over policy risk.”
The report’s findings come from Morgan Stanley’s Capex Plans Index, which is based on three-month averages of monthly regional Federal Reserve Bank survey data on manufacturing. The report notes that the planned capital investment growth isn’t equally spread around the country, with only three out of the five Federal Reserve districts accounting for the growth. The Philadelphia and New York districts reported declines.
The Gospel of Growth
Kyle Pomerleau of the Tax Foundation said the report’s findings would generally be heralded as “good news” for those who thought the TCJA would encourage additional investment through provisions like temporary full expensing or the corporate rate reduction. “This report suggests companies are responding,” he said.
The report, which shows a spike in capex, or capital expenditure, plans in mid-2016 through early 2017, followed by a second surge beginning in late 2017 and continuing through the present, suggests that companies may have made plans for capital investment in anticipation of the tax cuts, followed by a second round of plans for capital spending after the prospects for tax law changes improved late last year, Pomerleau said.
"If you were to put on Kevin Hassett’s shoes, you could say, ‘Oh, the provisions of the tax plan that were meant to encourage investment may actually be doing just that,’” he continued.
But Pomerleau also shared the familiar economic disclaimer that it’s impossible to observe the counterfactual, or what might have happened if the tax cuts had not been enacted. In fact, it will never be possible to fully determine what economic effects can be directly attributed to the tax cuts, he added.
Former CEA Chair Jason Furman similarly advised against over-interpreting the survey’s results, cautioning that both supporters and detractors of the TCJA will overreact to any news that bolsters their side’s position. “The truth is it is very hard to extract signals about what is intended to be a long-run change in incentives from short-term noise,” Furman, now a professor at Harvard University’s Kennedy School of Government, told Tax Analysts.
Furman emphasized that the surge in capital spending plans began in mid-2016, “a fact that was widely predicted based on the strengthening global economy.”
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