From the President's Desk: Two Things to Note About CapEx

  • by itradmin - Fri, 05/04/2018 - 16:24
Stacks of Change

The 100% expensing of qualified assets by businesses, courtesy of the Tax Cuts and Jobs Act of 2017, has received a lot of attention from politicians, the media, and businesses. It is a frequent subject of conversation as we discuss the economy with clients and audiences. Almost without exception, the feeling is that the 100% expensing will boost capital expenditures (capex), and thus boost the economy. What concerns us as economic consultants is that there is no evidence that capex spending has increased because of the new law, at least not on a large scale. Some industries and some companies may have benefited, but the economy, in general, does not appear to have benefited; not yet anyway.

Nondefense Capital Goods New Orders (without aircraft) is the broad category used to capture capex. If the new tax law is going to lead to a surge of new orders of capital equipment, it will show up here. The trouble is it is not showing up. Please note:

  • 1. The quarter-over-quarter rate of rise in the New Orders trend is moving down. There is a negative ITR Checking Point™ progression in place which indicates a slowing in the New Orders trend rate of rise. The trend is slowing, instead of accelerating as so many were expecting. Decelerating rise started in December 2017, and the trend continued through the first quarter of 2018. This growth rate would be moving higher if the tax law changes were working as anticipated.

  • 2. The month-to-month change in New Orders has been underwhelming:

    • January came in 10.6% below December, a near-typical decline for the month.
    • February posted an increase of 3.5% over January, which was milder than each of the last two years.
    • March posted a 16.7% increase from February, which was milder than four of the last five years (2016 was milder).

There are many provisions in the new tax law that appeal to folks and some that don’t. The question is whether the tax law changes are doing what the lawmakers hoped they would; so far, the answer appears to be no. We hope the answer to that question shifts, but the evidence suggests our long-standing outlook of slowing growth in US GDP in 2019 is on target. We will have a more in-depth look at the law, and what it means to you, at our upcoming webinar (Tuesday, May 22 at 2 p.m.).

Alan Beaulieu