It’s been nearly nine months since President Trump enacted the Tax Cuts and Jobs Act. So, how has this major tax overhaul impacted the economy in the first three quarters of 2018?
Back at the end of 2017, I felt this year’s economy would be healthy because of the tax cuts. I based this prediction on the positive results of George W. Bush’s 2003 tax cuts. And, so far, things are working out the way I believed they would. We’re currently trending positively in the economy, the labor market, and the overall investment landscape.
I want to dig into what’s behind our current economically solid state of affairs.
Let’s start with a look at what the 2003 and 2018 tax cuts have in common:
1. Just like the 2003 cuts, the 2018 tax reform suffered a barrage of criticism. People argued that they really would only benefit large corporations and the richest among us, who would, of course, hoard the money for themselves and not share in the wealth. Read as: there will be no “good” outcomes, like wage increases or overall growth. Fifteen years ago, tax cuts faced the same bullets. But, all of the concern turned out to be huffing and puffing. More on this in a moment.
2. Neither the 2003 and 2018 cuts were phased in like other tax reform over the years. Instead, the impact was immediate. This point is a major reason as to why the cuts during both of these years stimulated (and in the case of 2018, continues to stimulate) multiple parts of the economy. Remember, as early as February of this year, tax-withholding Americans started receiving higher net take-home paychecks. That’s big news for our nation’s families.
3. The size of both of these tax cuts was roughly the same relative to GDP, coming in at close to 1% of US GDP. Looking at the most recent reform, the total was $200 billion while our total GDP is $20 trillion, so we hit the 1% mark.
4. Both of the cuts were fairly similar in nature. In 2003, capital gains were trimmed, and there was a 50% cut taken via expensing capital of companies. In 2018, there were not only industry and corporate tax cuts, but corporations are also able to expense 100% of capital purchases.
5. To date, 2018 has proved to be even more significant than the 2003 cuts. We’ve seen huge influence in business. Arguably, the most significant piece of this substantial impact has to do with repatriation of overseas cash. So far, US companies have brought back an estimated $700 billion. The US is raising interest rates, and massive amounts of cash are coming back US coffers. No wonder the dollar is so strong these days.
Now (Jerry Maguire style), I’m going to show you the money.
Post-tax cuts in 2003, GDP surged to 7%. This number typically hovers around 2.25% on an annualized basis, so this spike was tremendous. After the initial swell, growth settled in at a healthy 3% level. And if you recall, this was after the tech bubble burst in 2000 and 2001.
The same thing seems to be happening this year.
We just saw our own 2018 surge in US GDP. The second quarter came in at a nominal 7% rate and at a more than 4% real rate when you adjust for inflation. My personal favorite GDP forecaster comes from right in our backyard, the ATL Fed. Their GDPNow estimate is pointing towards 4.7% growth in the third quarter.
Where exactly is this economic upside showing up? I’m glad you asked.
Remember, tax cuts put more net (after-tax) money in what I would estimate to be 90% of American households. So, the upswing has been apparent in US consumer spending and retail sales.
As our real per-capita disposable income goes up, we consumers are able to buy more. This same uptick in household spending happened for an entire year following the 2003 cuts, with retail spending tracking the increase almost perfectly. Today, we see a similar trend in income and retail spending.
And we’re not the only ones spending money; US companies are starting to put cash on the table, too.
I’m sure you’ve heard plenty about companies that are taking their new post-tax money and buying back their own stock and enriching their CEOs. And, yes, I think there’s no question there’s some of that happening. But, the number one use of repatriated cash has been to pay down debt.
Plus, we are beginning to see significant moves higher in capital spending – meaning that companies are investing in new technology, new machines, new plant equipment, and building new buildings.
All of this is fantastic news. But, I believe the most important impact we’ll see will be over the long haul.
Of course, only time will tell, but we do have some clues. The Congressional Budget Office has upgraded their economic forecast by $6 trillion over the next ten years according to one of our research partners. This number translates into $49,000 per household in America.
No one knows the specifics of where this new road will lead, but from all indications so far (and from what we know about the 2003 cuts) we are heading in a positive direction. With more money in the economy, in American businesses, and in the pockets of families, we all stand to benefit. As they say, more will be revealed, but I like what I see so far.