No, We Won’t See a Torrent of Investment From the Tax Bill

No, We Won’t See a Torrent of Investment From the Tax Bill

One of the arguments that Republicans are using to support their tax bill is that it will unleash investment.  The data says otherwise.  Currently, most US economic sectors are operating far below maximum capacity utilization.

As the debate on tax policy and its impact on investment continues, investors may seek guidance from wealth advisors on how to navigate potential market shifts. The idea that tax cuts will lead to increased investment is not necessarily supported by data, and investors may need to consider a variety of factors when making investment decisions in today’s economic climate.

Let’s start with manufacturing:

Figure 1

The top chart shows the CU rate for manufacturing while the bottom two charts break the data down into durable and non-durable subsets.  All three charts tell the same story: capacity utilization is at low historical levels.  Right now, it makes far more sense for companies to bring unused capacity back online rather than buy new equipment.
     Let’s turn to computer manufacturing and electric utilities:
Both charts tell a similar story: CU is low.
Mining is the only industry where a boost in investment is possible:
We see far more peaks and valleys.
The counter-argument is that spare capacity is outdated; as orders increase companies will be forced to add new, more modern capacity.  The problem with this argument is industrial production is actually very weak:
I broke the data down into its component pieces in this article over at TLR Analytics.  IP is the weakest of the coincident indicators this cycle.
In order to see an increase in CU, we need industrial production to pick-up.  And that’s just not happening.