A year ago, I argued that tax reform would boost the economy, employment, wages, research and development, capital spending, and corporate earnings.
Prominent critics like economist Larry Summers disagreed.
Summers insisted that – thanks to low productivity and population growth – the U.S. was mired in “secular stagnation” and that tax cuts would do nothing to change the anemic growth of the last decade.
Well, it’s been a year so let’s check in…
The U.S. economy is now growing at better than 3%. (And recall that 3% growth is not 1% better than 2% growth; it’s 50% better.)
In the first three quarters of 2018, capital investments by companies in the S&P 500 jumped nearly 19% to $475 billion, according to Howard Silverblatt of S&P Dow Jones Indices.
These companies also increased research and development (R&D) spending by 34% to $175 billion.
(And these are just the numbers for the nation’s biggest corporations. They don’t include the spending of thousands of other public and private companies.)
U.S. firms have also taken advantage of lower tax rates by bringing back capital that was formerly held overseas and investing it here in the U.S.
Apple (Nasdaq: AAPL), for example, spent $14.2 billion in R&D in 2018, according to regulatory filings. That’s up 23% from 2017.
It spent $16.7 billion in capital expenditures. It recently announced it would invest $1 billion to build a second corporate campus in Austin.
And it committed to spending $350 billion in the U.S. over the next five years.
True, some companies also used the tax reform windfall to buy back shares.
Some of the largest were Bank of America (NYSE: BAC) for $15.8 billion, Oracle (NYSE: ORCL) for $18 billion, Cisco (Nasdaq: CSCO) for $19 billion, Qualcomm (Nasdaq: QCOM) for $34 billion… and Apple for a hefty $64 billion.
Stock buybacks totaled $579 billion in the first three quarters of 2018.
With the market’s less-than-stellar fourth quarter performance, you might imagine these companies wish they had waited.
But from a longer-term perspective, they are almost certainly doing the right thing for shareholders.
According to Birinyi Associates, since the first quarter of 2008, U.S. companies have repurchased $5.7 trillion of their stock.
No doubt many of those who bought in early 2008 felt a bit sheepish a year later. But from a 10-year perspective, it looks like an act of genius.
Why? Because when companies shrink the number of outstanding shares it boosts the one metric the market cares most about: growth in earnings per share.
Some complain that top executives like share buybacks because the rise in earnings lifts stock prices and thus executive compensation.
But let’s recall why this is so.
In the ’80s and ’90s, critics argued that corporate chieftains were highly compensated even when their companies’ shares underperformed.
The market listened. Now executive pay is generally tied to share price performance. As the value of a company’s stock rises, so does compensation in the C-suite.
Yet the same folks now claim this is unfair.
They didn’t like when executive compensation wasn’t tied to share price performance. Now they don’t like it when it is.
Some people are just hard to please, I guess.
Income investors often prefer dividends to share buybacks.
Yet those folks should be pleased too.
Based on payouts through November, dividends set a new annual record at $420 billion, beating 2017’s record $419.7 billion.
Companies also used the tax cut to hire employees and raise wages.
Unemployment is now at a nearly 50-year low. (Black unemployment is at an all-time low.)
And, according to the Bureau of Labor Statistics, average income for U.S. private-sector employees was up 2.8% in 2018.
The news is even better for less skilled workers.
The American Enterprise Institute recently noted that weekly earnings for workers who didn’t complete high school shot up 6.5% over the past year.
So let’s sum up what has happened since the passage of the Tax Cuts and Jobs Act of 2017…
We have the best economy in decades, near-record-low unemployment, rising wages, booming capital spending, record corporate earnings and U.S. household net worth at an all-time high.
In other countries of the world – that haven’t experienced tax reform – growth is slowing, stalled or negative.
Our more competitive corporate tax rate bodes well for 2019 too.
Lower taxes give companies more money to hire, to spend, to invest and to grow.
That’s good for the economy, good for workers and good for equity investors like us.