This corrects an earlier version of this column, which erroneously referred to the “Bureau of Economic Affairs.” The acronym BEA stands for the Bureau of Economic Analysis.
Everyone is talking about jobs but I’d like to talk about another economic statistic that’s more important for the long run: Capital spending.
Yes, capex investment might seem like a boring topic compared to Stormy and Rudy and Kanye and even the labor-force participation rate, but I’d argue that the course our economy takes over the next decade depends to a large degree upon the decisions that business leaders are making right now about how much capital to deploy back into their business and how much to return to owners.
If we want more jobs, higher wages and a more productive economy later, we need to invest now in offices, factories, computers, machinery, trucks, software, research and development, and a thousand other essentials that make businesses run.
The good news is that corporations are increasing their investments again after a slump in 2015 and 2016. Over the past year, real business investment has increased at a 6.1% annual rate, according to the Bureau of Economic Analysis in the Commerce Department. It’s a good number, but nothing jaw-dropping.
The bad news is that net investment is very weak by historical standards. Companies have loads of cash, but little is going back into the business.
This dismal trend may be about to change for a very good reason: Businesses are reporting that strong demand is running up against the economy’s capacity (including imports). Supply chains are tight, and prices are rising for goods and services in short supply. The natural response by profit-maximizing companies would be to expand their capacity rapidly to meet demand, and to some extent that seems to be happening.
According to an analysis by equity strategist Jonathan Golub of Credit Suisse, capital spending by large companies in the S&P 500 index is on pace to increase 20% year-on-year, based on the companies that have already reported their first-quarter earnings.
Two-thirds of the first quarter’s dollar increase in capex comes from just 10 companies.
But Golub cautions against seeing the pickup in capex as a broad trend. It’s concentrated in just a few sectors and in stocks “with higher [return on equity] opportunities,” he wrote in a note to clients. Two-thirds of the dollar increase in the first quarter comes from just 10 companies: Alphabet General Motors AT&T Verizon Walmart Amazon Microsoft Intel Micron and Charter Communications
There’s another reason, of course, why companies might be expected to increase capital spending: The $1 trillion corporate tax cut that took effect on Jan. 1. Getting companies to invest more was the stated objective of the Republican office holders who pushed it through. They said letting companies keep more of their profits would lead to a surge in capital spending that would, in turn, boost the productivity of the economy and make the economy grow at 3% (or more) again year after year.
Aside from anecdotes, there is little evidence so far that companies have been motivated by their tax savings to invest more. The hard data don’t show any sizable increase since Jan. 1 (insert the usual warning to never take one quarter’s gross domestic product as definitive proof of anything).
In the first quarter, the government estimated, real nonresidential investment in structures, equipment and intellectual property rose at a 6.1% annual rate, down from 6.8% in the fourth quarter and 7.1% in the first quarter of 2017.
Investments in structures rose at a 12.3% annual pace, the fastest in a year, but they fell if you exclude the big rebound in oil and gas drilling. Investments in equipment rose at a 4.8% annual rate, the slowest in a year. Investments in intellectual property increased at a 3.6% annual rate, about in line with the average for the past five years.
In a word: unremarkable. There was nothing in the GDP investment data that pointed to any significant surge due to the tax change. It was just business as usual, reacting to the opportunities in the market. In coming quarters, we’ll be watching the capex figures closely to see if the tax cut is helping.
But in the first quarter, there was little correlation between the companies that got the biggest tax breaks and the companies that are investing the most. Google got a huge tax break and boosted capex by a lot, but Apple got the biggest break of all and announced that it would return almost all of its windfall to shareholders. General Motors invested $6.7 billion in the first quarter (the second-most of any company), but actually lost money on the tax cuts.
Several companies announced capital-spending plans following the tax cut, but an analysis by the admittedly hostile Americans for Tax Fairness found that most of the “new” capex spending by companies such as Apple, Comcast and ExxonMobil wasn’t new at all, just a continuation of previous trends.
So far, American corporations seem to be doing just what most economists expected them to do: Return the bulk of their tax-cut windfall to shareholders through share buybacks and dividends. It’s not a lack of capital that’s holding back investments in the American economy, it’s a lack of imagination.
So, the plan is to give the money to the people who already have more than they know what to do with. And even the most imaginative of our modern magnates can’t think of much to do with his fortune except build a rocket ship so he can escape.