Edward Conard

Top Ten New York Times Bestselling Author

  • “Unintended Consequences is full of substance, it is one of the must-read books of the year, and once I finish it I will be giving it a second read through right away.” - Tyler Cowen, Professor, George Mason University
  • “…reminds us that inequality sends a signal of what society lacks most, in America’s case, entrepreneurship and risk taking.” - Lawrence Lindsey, CEO, The Lindsey Group, former Director of the National Economic Council
  • “Unintended Consequences offers deep and well-argued analyses on almost every issue.” - The New York Times
  • “…a fresh argument for the productive value of inequality.” - David Autor, Professor of Economics, Massachusetts Institute of Technology
  • “…a very valuable contribution.” - Larry Summers, former Secretary of the Treasury and director of the National Economic Council, president emeritus, Harvard University
  • “…a must-read for serious students of economic policy.” - Glenn Hubbard, Dean, Columbia Business School, and former Chairman of the Council of Economic Advisers
  • “…challenges misconceptions that distort our economic debates.” - Arthur Brooks, President of the American Enterprise Institute
  • “…challenges misconceptions that distort our economic debates.” - Arthur Brooks, President of the American Enterprise Institute
  • “…a fresh argument for the productive value of inequality.” - David Autor, Professor of Economics, Massachusetts Institute of Technology
  • “…a very valuable contribution.” - Larry Summers, former Secretary of the Treasury and director of the National Economic Council, president emeritus, Harvard University
  • “…a must-read for serious students of economic policy.” - Glenn Hubbard, Dean, Columbia Business School, and former Chairman of the Council of Economic Advisers
  • “Unintended Consequences provides a provocative interpretation of the causes of the global financial crisis and the policies needed to return to rapid growth. Whether you agree or not, this analysis is well worth reading.” - Nouriel Roubini, New York University; Chairman, Roubini Global Economics
Upside of Inequality Oxford Unintended Consequences

Macro Roundup


Friday, December 14, 2018

AI Summary. U.S. nonfinancial corporate debt has reached roughly 0.46x GDP, above its 2008-09 peak of 0.45x. Most companies can still cover their interest payments, but their capacity to do so has diminished as borrowing costs rise.

Alexandra Scaggs Barron's
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U.S. nonfinancial corporate debt has surged to approximately 0.46x the size of GDP, surpassing its 2008-09 peak of 0.45x GDP.

Are rising borrowing costs eroding corporations' ability to service record debt?

Core argument: U.S. nonfinancial corporate debt has reached roughly 0.46x GDP, surpassing its 2008–09 peak of 0.45x GDP.

U.S. nonfinancial corporate debt has surged to approximately 0.46x the size of GDP, surpassing its 2008-09 peak of 0.45x GDP. This increase in debt relative to economic output highlights a growing vulnerability as rising interest rates make borrowing more expensive. While most companies can still manage their interest payments, their capacity to do so has diminished in recent years. The current economic environment, characterized by higher borrowing costs, poses challenges for corporations that have relied on cheap credit to finance growth and operations. As interest rates continue to rise, the pressure on corporate balance sheets is likely to intensify, potentially impacting investment and expansion plans. This situation underscores the importance of prudent financial management and strategic planning in navigating the complexities of a changing macroeconomic landscape.

Takeaways by Macro Roundup® AI

  1. U.S. nonfinancial corporate debt has reached roughly 0.46x GDP, surpassing its 2008–09 peak of 0.45x GDP.
  2. Most U.S. companies can still cover their interest payments, though their capacity to do so has diminished in recent years.
  3. Rising interest rates raise borrowing costs for corporations that relied on cheap credit to finance growth and operations, adding pressure to corporate balance sheets.

Great chart"...As a result, U.S. nonfinancial corporate debt when compared with economic output has climbed to roughly 0.46 times the size of the gross domestic product, exceeding its peak of about 0.45 times GDP during the 2008-09 contraction.....Most companies can still easily pay interest on their debt, but their capacity has declined in recent years, according to FactSet..."

Rising Interest Rates Complicate the Corporate Borrowing Spree: Extended Excerpt Image 1


Rising Interest Rates Complicate the Corporate Borrowing Spree: Extended Excerpt Image 2


Alexandra Scaggs, "Rising Interest Rates Complicate the Corporate Borrowing Spree,"Barrons, December 13, 2018, https://www.barrons.com/articles/stocks-or-bonds-investors-must-choose-with-rising-rates-51544725284

AI Summary. The Congressional Budget Office projects mandatory spending on programs such as Social Security, Medicare, and Medicaid will rise from 13.1% of GDP to 15.2% over a decade, while discretionary spending falls from 6.3% to 5.4%. Federal revenues are projected to rise from 16.5% of GDP to 18.5% if current laws remain unchanged.

CBO’s Budget Analysis Division and Joint Committee on Taxation Staff Congressional Budget Office
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Mandatory spending is projected to rise from 13.1% of GDP in 2017 to 15.2% by 2028, driven by programs like Social Security, Medicare, and Medicaid.

How will federal spending and revenues shift as a share of GDP?

Core argument: CBO projects mandatory spending will rise from 13.1% of GDP in 2017, when it totaled $2.8tn, to 15.2% by 2028, driven by programs including Social Security, Medicare, and Medicaid.

The Congressional Budget Office (CBO) projects that mandatory spending, which was $2.8tn in 2017, will rise from 13.1% of GDP in 2017 to 15.2% by 2028, driven by programs like Social Security, Medicare, and Medicaid. Spending on individuals aged 65+ is expected to increase from 6.7% of GDP in 2018 to 8.8% in 2028. Conversely, discretionary outlays are projected to decline from 6.3% of GDP in 2018 to 5.4% in 2028. Federal revenues, primarily from individual income taxes, were $3.3tn in 2018, equating to 16.4% of GDP, with a historical average of 17.4%. If current laws remain unchanged, revenues are anticipated to rise from 16.5% of GDP in 2019 to 18.5% by 2028. These projections highlight the growing fiscal pressure from mandatory spending and the need for strategic deficit reduction measures.

Takeaways by Macro Roundup® AI

  1. CBO projects mandatory spending will rise from 13.1% of GDP in 2017, when it totaled $2.8tn, to 15.2% by 2028, driven by programs including Social Security, Medicare, and Medicaid.
  2. CBO projects spending on individuals aged 65+ will increase from 6.7% of GDP in 2018 to 8.8% in 2028, while discretionary outlays decline from 6.3% to 5.4% of GDP.
  3. Federal revenues were $3.3tn in 2018, or 16.4% of GDP, below the 17.4% historical average, and CBO projects they will rise from 16.5% of GDP in 2019 to 18.5% by 2028 under current law.

Lots of great data here on the lay of the land of Federal spending and revenue. CBO's playbook for potential deficit reduction.

".....Mandatory spending—which totaled about $2.8 trillion in 2017, or 70 percent of federal outlays—consists of spending that is generally governed by statutory criteria and is not normally constrained by the annual appropriation process....As a share of the economy, mandatory spending increased significantly between 1968 and 1975, from 5.5 percent to 9.4 percent of gross domestic product (GDP).... If no new laws were enacted affecting mandatory programs, the Congressional Budget Office estimates that mandatory outlays would continue to increase as a share of the economy, rising from 13.1 percent of GDP in 2017 to 15.2 percent in 2028.3 By comparison, such spending averaged 9.8 percent of GDP over the past five decades....in CBO’s projections, spending on people age 65 or older for Social Security, Medicare, and Medicaid would increase from 6.7 percent of GDP in 2018 to 8.8 percent in 2028.... In the Congressional Budget Office’s baseline projections, discretionary outlays decline further relative to the size of the economy, falling from 6.3 percent of GDP in 2018—already below their 50-year average of 8.5 percent—to 5.4 percent in 2028....in 2018, the federal government collected $3.3 trillion in revenues, equal to 16.4 percent of the nation’s gross domestic product (GDP).Individual income taxes were the largest source of revenues, accounting for 51 percent of the total. Social insurance taxes (primarily payroll taxes collected to support Social Security and Medicare) accounted for 35 percent. Six percent of the total was from corporate income taxes. Other receipts made up the remaining 8 percent (see Figure 4-1)....Over the past 50 years, total federal revenues have averaged 17.4 percent of GDP—ranging from a high of 20.0 percent in 2000 to a low of 14.6 percent in 2009 and 2010 (see Figure 4-2).That variation in total revenues as a share of GDP has primarily resulted from fluctuations in receipts of individual income tax payments and, to a lesser extent, in collections of corporate income taxes....From 1968 to 2018, revenues from individual income taxes have ranged from slightly more than 6 percent of GDP (in 2010) to slightly less than 10 percent of GDP (in 2000).... If current laws generally remained unchanged, revenues would gradually rise over the next decade—increasing from 16.5 percent of gross domestic product in 2019 to 18.5 percent by 2028...."

CBO’s Budget Analysis Division and Joint Committee on Taxation Staff, "Options for Reducing the Deficit: 2019 to 2028," Congressional Budget Office, https://www.cbo.gov/system/files

AI Summary. Some rural US counties post high output per worker — roughly $306,000 in Sioux County, Nebraska, and $203,000 in Southeast Fairbanks, Alaska — but support few jobs because their economies rest on mechanized oil extraction and large-scale agriculture. Excluding such cases, 50–55m Americans live in rural communities with limited private-sector job opportunities.

Eduardo Porter New York Times
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The US has 50-55 million people in rural communities with limited private sector job opportunities, raising questions about viable solutions for revitalizing these areas.

Does high output per worker in rural areas create many jobs?

Core argument: Sioux County, Nebraska, generates an economy worth $306,000 per worker, yet supports few jobs because such output comes from mechanized industries such as oil extraction and large-scale agriculture.

Despite some rural areas achieving high productivity levels, such as Sioux County, Neb., with an economy worth $306,000 per worker, these regions support few jobs due to reliance on mechanized industries like oil extraction and large-scale agriculture. Similarly, Southeast Fairbanks, Alaska, boasts an output per worker of $203,000 but has a population under 7,000. Excluding these exceptions, the US still has 50-55m people in rural communities with limited private sector job opportunities. This economic landscape raises questions about viable solutions for revitalizing these areas or whether depopulated regions should be left to revert to nature.

Takeaways by Macro Roundup® AI

  1. Sioux County, Nebraska, generates an economy worth $306,000 per worker, yet supports few jobs because such output comes from mechanized industries such as oil extraction and large-scale agriculture.
  2. Southeast Fairbanks, Alaska, produces $203,000 of output per worker with a population under 7,000, another case where high productivity coincides with minimal employment.
  3. Excluding such high-productivity exceptions, 50-55m Americans live in rural communities with limited private sector job opportunities, raising the question of whether depopulated regions should be left to revert to nature.

new Porter just an FYI"....There are, to be sure, some rural communities with productivity as high as some big cities. But they rely on heavily mechanized and automated industries that support few jobs: oil extraction or large-scale agriculture, in which tractors talk to satellites and no drivers are involved. The livestock business on the vast pastures of Sioux County, Neb., for example, supports an economy worth $306,000 per worker, according to data from Mr. Muro and Jacob Whiton of Brookings. But only 1,200 people live there. In the Southeast Fairbanks area of Alaska, it is all about oil and gas. Output per worker is $203,000. But its population doesn’t quite reach 7,000. Excluding these places, the United States is still left with 50 to 55 million people living in rural communities that no longer have much to offer them economically. What if nothing really works? Is there really no option but to do nothing and, as some have suggested, return depopulated parts of rural America to the bison?..."
Eduardo Porter, "The Hard Truths of Trying to ‘Save’ the Rural Economy,"New York Times, December 14, 2018, https://www.nytimes.com/interactive/2018/12/14/opinion/rural-america-trump-decline.html

Monday, December 17, 2018

AI Summary. Data on capital expenditures per share for the companies in the S&P 500 stock index tracks corporate spending on long-term investment and infrastructure, measured in dollars and not adjusted for depreciation.

Ed Yardeni Yardeni Research
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S&P 500 Capital Expenditures Dollars per Share 1994-2018.

How much are large public companies investing per share?

Core argument: The S&P 500 capital expenditures per share series covers 1994–2018 in dollar terms, tracking corporate investment trends across the companies in the index.

From 1994 to 2018, the S&P 500 capital expenditures (capex) per share, measured in dollars, provides a critical insight into corporate investment trends within the index. This metric, which does not reflect year-over-year changes or account for depreciation, highlights the financial commitment of companies to long-term growth and infrastructure. Understanding capex per share is essential for evaluating the economic health and future potential of these firms, as it directly impacts their ability to innovate and expand. The data underscores the importance of capital allocation decisions in shaping the competitive landscape and influencing shareholder value. As companies navigate economic cycles, their capex strategies reveal priorities and potential shifts in industry dynamics, offering valuable insights for investors, economists, and policymakers.

Takeaways by Macro Roundup® AI

  1. The S&P 500 capital expenditures per share series covers 1994–2018 in dollar terms, tracking corporate investment trends across the companies in the index.
  2. The S&P 500 capex-per-share measure is presented as a level rather than a year-over-year change and does not account for depreciation.
  3. Capex per share indicates companies' financial commitment to long-term growth and infrastructure, bearing on their ability to innovate and expand.

Yardeni Research has S&P 500 capex per share in $. Note this is not y/y change like theEconomistchart. Unclear if it nets depreciation

Stock Market Briefing SP 500 Income Statement and Ratios: Extended Excerpt Image 1


Stock Market Briefing SP 500 Income Statement and Ratios: Extended Excerpt Image 2


Stock Market Briefing SP 500 Income Statement and Ratios: Extended Excerpt Image 3


Ed Yardeni and Joe Abbott, "Stock Market Briefing S&P 500 Income Statement and Ratios," Yardeni Research, November 15, 2018, https://www.yardeni.com/pub/spxis.pdf

AI Summary. Capital spending among S&P 500 companies has surged, with the technology sector accounting for over half the growth, and Alphabet's capital expenditure reaching $7.3bn — nearly triple the prior year — on data centers and real estate. Alphabet's shares fell 4.8% after earnings as investors questioned whether such spending is sustainable.

Akane Otani Wall Street Journal
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Capex among S&P 500 firms surged in Q1, driven by tech sector growth. Alphabet’s capex nearly tripled to $7.3bn, but shares fell 4.8% post-earnings as investors questioned spending sustainability.

Does surging capital spending lift share prices for investing companies?

Core argument: Alphabet's capital expenditure reached $7.3bn, nearly triple the prior year's level, driven by investments in data centers and real estate.

Capital expenditure (capex) among S&P 500 firms has surged, particularly in the tech sector, which accounts for over half of the growth in Q1. Alphabet's capex reached $7.3bn, nearly triple its previous year's spending, driven by investments in data centers and real estate. Despite a rise in quarterly profits due to strong advertising demand, Alphabet's shares fell 4.8% post-earnings as investors questioned the sustainability of such high spending. This highlights a disconnect between increased capex and immediate shareholder returns, as market reactions remain cautious despite potential long-term value creation.

Takeaways by Macro Roundup® AI

  1. Alphabet's capital expenditure reached $7.3bn, nearly triple the prior year's level, driven by investments in data centers and real estate.
  2. Alphabet's shares fell 4.8% after earnings despite higher quarterly profits on strong advertising demand, as investors questioned the sustainability of its elevated spending.
  3. Capital spending among S&P 500 firms has surged, with the tech sector accounting for over half of the first-quarter growth.

this is from this spring,

Capital Spending Boom Is No Great Boost to Capital Markets: Extended Excerpt Image 1

".... Capital spending has been growing rapidly in the tech sector, where companies that have seen some of the biggest share-price growth in recent years are becoming increasingly capital intensive. More than half of the growth in first-quarter capex spending can be attributed to the tech sector, Credit Suisse data show. Investments in data centers, undersea cables and New York City real estate pushed Alphabet’s capex tab in the first quarter to $7.3 billion—the most of any S&P 500 firm, and nearly triple what it spent a year earlier. Although Alphabet’s quarterly profits surged thanks to strong demand from advertisers, its shares tumbled 4.8% on the day following its earnings report as investors questioned the sustainability of the costliest spending spree in the firm’s 14-year history as a public company. The stock has since rebounded. The company has said it believes these investments will create shareholder value."Akane Otani, Ben Eisen and Chelsey Dulaney, "Capital Spending Boom Is No Great Boost to Capital Markets,"Wall Street Journal, May 15, 2018, https://www.wsj.com/articles/capital-spending-boom-is-no-great-boost-to-capital-markets-1526376600

AI Summary. Business investment adjusted for net depreciation and inflation has shown minimal growth since the corporate tax overhaul, with capital spending remaining relatively flat despite lower corporate tax rates. The absence of an investment surge raises questions about whether the tax cuts have effectively incentivized companies to increase capital spending.

Matthew Klein Barron's
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Corporate tax changes have failed to boost business investment. Investment levels remain flat despite tax cuts, raising concerns about productivity and economic expansion.

Have lower corporate tax rates boosted business investment?

Core argument: Business investment adjusted for net depreciation and inflation has shown minimal growth since the corporate tax overhaul, with the anticipated surge in capital expenditures failing to materialize despite lower corporate tax rates.

The corporate tax changes intended to boost business investment have not yielded the expected results. Business investment, when adjusted for net depreciation and inflation, has shown minimal growth since the tax overhaul. Despite the reduction in corporate tax rates, the anticipated surge in capital expenditures has not materialized, with investment levels remaining relatively flat. This stagnation suggests that the tax cuts have not effectively incentivized companies to increase their capital spending. The lack of significant investment growth raises concerns about the long-term impact on productivity and economic expansion, as businesses are not reinvesting their tax savings into growth-driving assets. Consequently, the policy's effectiveness in stimulating economic activity and enhancing competitiveness remains questionable.

Takeaways by Macro Roundup® AI

  1. Business investment adjusted for net depreciation and inflation has shown minimal growth since the corporate tax overhaul, with the anticipated surge in capital expenditures failing to materialize despite lower corporate tax rates.
  2. Flat investment levels following the corporate tax cuts suggest the policy has not effectively incentivized companies to increase capital spending, leaving its effectiveness in stimulating economic activity questionable.
  3. The absence of significant investment growth raises concerns about long-term productivity, economic expansion, and competitiveness, as businesses are not reinvesting tax savings into growth-driving assets.

business investment net depreciation and inflation (Indexed to 2012)

So Far, the Corporate Tax Changes Have Been a Bust: Extended Excerpt Image 1


Matthew Klein, "So Far, the Corporate Tax Changes Have Been a Bust,"Barrons, December 7, 2018, https://www.barrons.com/articles/last-years-corporate-tax-overhaul-hasnt-made-much-of-a-difference-1544226832

AI Summary. Structures and equipment capital spending, two-thirds of total US capital expenditure, stands at $1.9tn and is growing 6-7% year on year, but a 20% rise in energy capital spending — just 8% of the total — accounts for much of that; excluding energy, growth is under 5%. Weaker-than-expected capital spending would pose downside risk to GDP forecasts.

Francis Rybinski and Harris Kere Aegon Assert Management
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US capex growth is driven by 20% yoy increase in energy capex, which makes up only 8% of total S&E capex. Excluding energy, tangible capex growth is under 5%. @FrancisRybinski @HarrisKere, Aegon Assert Management.

Is US capital spending growth weaker than headline numbers suggest?

Core argument: Structures and equipment capex, two-thirds of total US capex, stands at $1.9tn and is growing 6–7% year on year, but excluding energy, tangible capex growth is under 5%.

Despite a robust US economy and revised tax code boosting profit growth, capex spending is not as strong as perceived. S&E [Structure and Equipment] capex, which makes up two-thirds of total capex, is at $1.9tn, growing 6-7% year on year. However, this growth is significantly driven by a 20% year-on-year increase in energy capex, which constitutes only 8% of total S&E capex. Excluding energy, tangible capex growth is under 5%. The previous 30-50% growth in energy capex, following a 60% decline, masks modest trends elsewhere. Trade uncertainties and potential policy reversals add to the caution, with S&P 500's 15% return on equity making stock buybacks appealing. If capex falls short of expectations, GDP forecasts may face downside risks, potentially influencing Federal Reserve rate decisions.

Takeaways by Macro Roundup® AI

  1. Structures and equipment capex, two-thirds of total US capex, stands at $1.9tn and is growing 6–7% year on year, but excluding energy, tangible capex growth is under 5%.
  2. Energy capex is rising 20% year on year while making up only 8% of structures and equipment capex, and its earlier 30–50% growth followed a 60% decline, masking modest trends elsewhere.
  3. Trade uncertainties and potential policy reversals add caution, while the S&P 500's 15% return on equity makes stock buybacks appealing; capex falling short of expectations would pose downside risk to GDP forecasts and could influence Federal Reserve rate decisions.

Francis Rybinski and Harris Kere, "The Great Capex Resurgence - A Cautionary Tale," Aegon Assert Management, November 27, 2018, https://www.aegonassetmanagement.com/us/thought-leadership/blog/macro-research/the-great-capex-resurgence---a-cautionary-tale/

The Great Capex Resurgence - A Cautionary Tale

As we close out the year, a robust US economy, revised tax code and repatriation of foreign earnings has provided many US companies with a boost to profit growth which typically signals a resurgence of capital-expenditure spending (capex) and a strong growth outlook. However, as we approach 2019, companies' capex spending is slowing slightly. While it will still be one of the key drivers to growth in the next year, we believe that capex is not as robust as the headlines imply. In fact, we believe the risk in the downside predictions is that they are not realistic enough, due largely to masked modest trends in growth, uncertainty in trade, and waning foreign direct investment (FDI).

Not the full story

After record spending by companies in the S&P 500 Index in the first half of the year, capex is not as strong as many believe it to be. Consider structure and equipment (S&E) capex—the tangible components accounting for two-thirds of total capex—which is currently at $1.9 trillion. Exhibit 1 illustrates that structure and equipment (S&E) industry capex has grown 6-7% year on year. But, this has been significantly boosted by the recovery in energy capex after an enormous decline in 2015 and 2016. Ex-energy, the rally in S&E capex has been less thrilling. Energy is only 8% of total S&E capex, but it is growing 20% year on year—down from 60%. When the energy component from capex is removed, tangible capex is growing at less than 5%. In short, the 30-50% year-on-year growth in energy capex—after a 60% decline in absolute levels over the past few years—is masking modest capex trends elsewhere.

The Great Capex Resurgence - A Cautionary Tale: Extended Excerpt Image 1


Trade wars

Uncertainty surrounding tariffs and trade could affect capex and FDI as projects that typically have long lead times and changing trade landscape can dramatically alter the economic viability. This, coupled with Democrats threatening to reverse the corporate tax cut and it is understandable that capex surveys have seemingly peaked, reflecting growing caution by management teams to increase capex spending. Economic symptoms of lower trend growth also indicate increased caution. What is also not helping is the high relative hurdle rate—return on equity of S&P 500 is currently at 15%, making the argument for stock buybacks quite compelling. With these factors in motion, we think the skew of risk distribution to consensus growth forecasts is to the downside.

What does it mean?

Capex is a key driver to above-trend growth in 2019. If capex falls below consensus expectations, downside risks to current gross domestic product forecasts could force the Federal Reserve to lower the dots on its projected interest rate dot plot and hike rates less than the dots will imply. After a year of strong capex spending buoyed by Trump's tax law, the US' solid rule of law and advantaged energy costs, the outlook on capex should tell a more robust story. While the general consensus sees a slight slowing of capex spending, we are more cautious going into year-end as we think the risk is asymmetrically skewed to the downside.

AI Summary. U.S. net domestic investment by private businesses fell during the 2008 financial crisis and then recovered gradually, with a sharper rise coinciding with the passage of tax cuts. The data indicate that business investment is sensitive to fiscal policy changes and broader economic conditions.

U.S. Bureau of Economic Analysis Bureau of Economic Analysis
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US private domestic business investment saw significant fluctuations from Q1 2007 to Q3 2018, with a notable dip during the 2008 financial crisis and a sharp rise following tax cuts in Q4 2017.

Does business investment respond to tax cuts and economic conditions?

Core argument: U.S. net domestic investment by private domestic businesses fluctuated from Q1 2007 to Q3 2018, dipping during the 2008 financial crisis before recovering gradually.

From Q1 2007 to Q3 2018, net domestic investment in private domestic businesses in the U.S. experienced significant fluctuations, reflecting broader economic trends and policy impacts. The period saw a notable dip during the 2008 financial crisis, followed by a gradual recovery. By Q4 2017, coinciding with the passage of tax cuts, investment levels began to rise more sharply, indicating a positive response from the private sector. This trend underscores the sensitivity of domestic business investment to fiscal policy changes and economic conditions. The data highlights the importance of stable economic policies to foster sustained investment growth, which is crucial for long-term economic expansion and competitiveness.

Takeaways by Macro Roundup® AI

  1. U.S. net domestic investment by private domestic businesses fluctuated from Q1 2007 to Q3 2018, dipping during the 2008 financial crisis before recovering gradually.
  2. Beginning in Q4 2017, coinciding with the passage of tax cuts, U.S. net private domestic business investment rose more sharply.
  3. The pattern of U.S. net private domestic business investment from 2007 to 2018 suggests business investment is sensitive to fiscal policy changes and economic conditions.

Here is Net Domestic Private Business investment in Billions of Dollars Range is is Q1 2007 though Q3 2018 (Tax cut passed Q4 2017)

Net Domestic Investment: Private: Domestic Business: Extended Excerpt Image 1


U.S. Bureau of Economic Analysis, "Net Domestic Investment: Private: Domestic Business," Federal Reserve Bank of St. Louis, Accessed December 17, 2018, https://fred.stlouisfed.org/series/W790RC1Q027SBEA

AI Summary. Business capital spending on fixed assets such as equipment and buildings has picked up, supported by increased cash flow from corporate tax cuts, but the growth is moderate relative to past expansions. The uptick suggests the economic expansion retains momentum without signaling a major surge.

Justin Fox Bloomberg
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Business capital spending in 2018 shows a positive trend, driven by increased cash flow from corporate tax cuts. However, growth appears moderate when measured against past expansions. @JustinFox

Have corporate tax cuts produced a business investment boom?

Core argument: Business capital spending on fixed assets such as equipment and buildings rose in 2018 relative to 2016 and 2017, with increased cash flow from the corporate tax cuts cited as a driver.

Business capital spending in 2018 shows a positive trend when compared to 2016 and 2017, driven by increased cash flow from recent corporate tax cuts. However, when measured against past expansions, the growth appears moderate. The uptick in investment, focused on fixed assets like equipment and buildings, suggests the ongoing economic expansion, now the second-longest on record, still has momentum. Yet, the scale of this investment is not substantial enough to signal a major economic surge. The economic impact of the tax legislation will continue to unfold over the coming years, potentially influencing future investment patterns.

Takeaways by Macro Roundup® AI

  1. Business capital spending on fixed assets such as equipment and buildings rose in 2018 relative to 2016 and 2017, with increased cash flow from the corporate tax cuts cited as a driver.
  2. Measured against past expansions, 2018 business investment growth is moderate rather than a boom, and its scale is not large enough to signal a major economic surge.
  3. The 2018 investment uptick suggests the economic expansion, the second-longest on record, retains momentum, while the tax legislation's economic impact will continue to unfold over the coming years.

nuanced view from Justin Fox on "capex whiplash" depends you your baseline

"...For several months now, consumers of U.S. business media have beensubjected to what you could call capex whiplash. That is, one day you’ll read or hear that business capital spending is booming, and a few days later you’ll be told that it is not.I had been confused by this, but just a few minutes of reading and chart-making made clear that the main thing driving the differing assessments is simply the time frame. If you compare current business capital spending (that is, spending on fixed assets such as equipment, buildings and land) 1with that of 2017, or 2016, it looks great. If you compare these capex gains with those of past expansions, or even earlier in the current expansion, they look … OK. And given how much cash U.S. corporations suddenly have on their hands thanks to the big tax cuts approved by Congress and signed into law by the president late last year, “OK” is perhaps slightly disappointing.This does not mean the corporate tax cuts were necessarily a bust. Economic growth will likely be up this year over 2016 and 2017, and the economic effects of the tax legislation will be playing out for years to come.The recent uptick in business investment is a hopeful sign that the now-nine-year-old expansion — the second-longest on record — has some life left in it yet. This capital spending increase just isn’t big or sustained enough (at least not yet) to indicate any kind of major economic takeoff...."

Justin Fox, "Businesses Are Investing More in 2018, But It’s No Boom," Bloomberg, July 26, 2018, https://www.bloomberg.com/opinion/articles/2018-07-26/business-capital-spending-is-good-but-not-great

AI Summary. The 2008 financial crisis was driven more by a European banking glut than an Asian savings glut, as European banks channeled funds into riskier, short-term US private mortgage-backed securities while Asian official holders bought safer US government bonds. This European capital took on credit and maturity risk and enabled US households to lever up.

Robert McCauley Bank for International Settlements
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The 2008 financial crisis was driven by a European banking glut rather than an Asian savings glut, according to @RobertMcCauley @Bank_for_International_Settlements. European banks took on credit and maturity risk by purchasing riskier US mortgage bonds.

Was the 2008 crisis driven by European banks rather than Asian savings?

Core argument: From end-2002 to mid-2007, European banks channeled substantial funds into US private asset-backed securities, while Asian official holders bought safer US government bonds, pointing to a European banking glut rather than an Asian savings glut as a significant driver of the 2008 crisis.

The 2008 financial crisis was significantly driven by a European banking glut rather than an Asian savings glut. From end-2002 to mid-2007, European banks and others funneled substantial funds into US private asset-backed securities, contrasting with Asian official holders who invested in safer US government bonds. European banks took on credit and maturity risk by purchasing riskier, short-term bonds backed by US mortgages, which enabled the leveraging-up of US households. This influx of European capital matched US mortgage market trends towards private credit risk and floating interest rates, leading to a shift from fixed-rate to adjustable-rate mortgages. Additionally, European banks' activities contributed to housing booms in Ireland and Spain, underscoring the transatlantic nature of the crisis.

Takeaways by Macro Roundup® AI

  1. From end-2002 to mid-2007, European banks channeled substantial funds into US private asset-backed securities, while Asian official holders bought safer US government bonds, pointing to a European banking glut rather than an Asian savings glut as a significant driver of the 2008 crisis.
  2. European banks took on credit and maturity risk by buying riskier, short-term bonds backed by US mortgages, which enabled US households to leverage up and accompanied a shift from fixed-rate to adjustable-rate mortgages.
  3. European banks' activities also contributed to housing booms in Ireland and Spain, underscoring the transatlantic nature of the 2008 financial crisis.

research note from BIS looks at if the global savings glut was driven by East Asian or European surpluses. concludes it was the Europeans pushing their savings on US that drove crisis.

"...The Asian savings glut hypothesis posits that net inflows into high-grade US public bonds from countries running current account surpluses led to the housing boom and bust. An excess of savings over investment abroad led to an excess of US investment over savings....Twice as much money flowed into US bonds from March 2000 to mid-2007 from Asian official holders as flowed into US private asset-backed securities from European banks and others between end-2002 and mid-2007. In the first, official reserve managers purchased safe, longer-term US government obligations, generally funding themselves with domestic currency liabilities. In the second, banks purchased riskier, short-term bonds backed by US mortgages, commercial real estate and other assets, funded by short-term dollar debt. Asian reserve managers took duration risk. European banks took credit and maturity risk, buying risky so-called “spread product” to earn a margin over the cost of short-term funding..... The European banking glut hypothesis holds that gross inflows into private bonds led to the boom. Leveraging up by European banks enabled the leveraging-up of US households. Gross flows from Europe better matched US mortgage market trends towards private credit risk, floating interest rates and narrow spreads. What is more, European banks produced, not just invested in, US mortgage backed securities. Their US securities affiliates held huge exposures to such securities that deserve recognition..... The banking glut offers a better account than the savings glut for US mortgage market developments of the 2000s. Large official inflows into US Treasury and agency notes should have reinforced a US mortgage market dominated by fixed rate mortgages that enjoyed government agency guarantees. Instead, we observe a big shift to mortgages priced with floating (“adjustable”) interest rates and to more risky, leveraged mortgages that agencies could not guarantee. The dominance of the savings glut with its demand for safe assets should have manifested itself in wider spreads, but the spread of the riskiest mortgages over normal ones actually narrowed...... Furthermore, European banks’ leveraging-up also provided credit that enabled housing booms in Ireland and Spain. These findings favour the European banking glut hypothesis..."

Robert McCauley, "The 2008 crisis: transpacific or transatlantic," Bank for International Settlements, December 2018, https://www.bis.org/publ/qtrpdf/r_qt1812f.pdf