One of the big unknowns about the course of the U.S. economy over the next two or three years is how companies will spend their corporate tax cuts. The numbers are quite significant, as the tax bill for a lot of companies will decline by thirty percent or more. Thus far CEOs and CFOs have been a bit cagey as to how the windfall will be allocated, not least because the subject is politically sensitive.
There are four possible destinations for the increased profits: they can go (1) to shareholders, (2) to the shareholders of other companies for purposes of corporate acquisitions, (3) to workers in the form of higher wages, or (4) to other companies to buy property and equipment. The latter two—higher wages and capital investment—would be most helpful for the economy, with capital investment perhaps being ideal. While capital expenditures would give the economy a short-term boost, they would also have a longer term payout as new equipment gradually comes on line.
The economy looks pretty solid right now and there is no recession in sight. Investments that might pay off in 2019, 2020 or beyond could help ensure that the economic expansion goes on for a while longer. Thus far increases in capital expenditures seem to be focused on technology companies building out infrastructure to support things like cloud computing and online shopping. That’s probably not related to the tax legislation. It will be interesting to see if increased purchases of property and equipment spread into other sectors, laying the groundwork for a continuation of the expansion beyond the next eighteen months.