Firms hoarding tax savings

The Wall Street Journal

“Why aren’t companies spending more?” asked Justin Lahart. The corporate tax cut was supposed to bring about “a renaissance in capital spending,” but it simply isn’t happening. The Commerce Department reported last week that orders for durable goods—longlasting equipment such as tractors and machinery— dropped 1.7 percent in April from the previous month. Even if we exclude the drop in aircraft orders, spending on nondefense capital goods was up an anemic 1 percent. That’s shocking, “given how much money the corporate tax cut is providing companies, and how much money is being repatriated from overseas.” It’s also clearly at odds with what companies

have been saying. In a survey earlier this year, corporate executives said they expected capital spending at their companies to increase an average of 11 percent over the next 12 months. “So what is going on?” It could be that the firms are about to spend more now that they know how much savings they can expect from the tax cuts. But it could also be that companies simply prefer to give the money back to shareholders via dividends and buybacks. Whatever the cause, the tight labor market “is giving companies a good reason to boost their existing workers’ productivity” via capital spending, and the tax cuts have given them the means. “Their hesitation is unsettling.”