Before the recent tax reform passed in December, it was thought that the tax cuts could boost corporate spending on new offices, equipment and factories. But that may not be the case – yet – which means S&P 500 companies have a record high of $1.78 trillion in cash, Bloomberg reported.
In comparison to their cash flow, S&P 500 companies are spending about the same amount of money on capital expenditures, stock buybacks and dividends that they have in the past. But with the reduction in corporate tax from 35 percent to 21 percent, it was expected that companies would dramatically increase their spending. Although spending by S&P 500 companies is projected to increase by 18 percent this year to $61 billion, Bloomberg reported that increase was the same rate seen in 2014.
Even so, large investments are planned many years in advance. Royal Caribbean, for example, is expected to see a 500 percent rise in capital expenditures this year to $3.6 billion, but that rise is due to cruise ships that the company ordered 10 years prior.
The news comes as core capital goods shipments increased from last February to at least last November, partly due to an expectation of corporate tax cuts. “With the passage of a corporate tax cut becoming more possible, the likelihood is that future business capital spending should be strong,” Joel Naroff, chief economist at Naroff Economic Advisors in Holland, Pennsylvania, said in November.
In addition, business spending on equipment has sustained economic growth for the past four quarters as of November. In turn, that spending has helped to boost manufacturing, which accounts for about 12 percent of the U.S. economy. In October, there were increases in orders for machinery, electrical equipment, appliances and components, primary metals and computers and electronic products.
The economy grew at a 3.0 percent annualized rate in the third quarter of 2017, and growth estimates for the fourth quarter range from as low as a 2.5 percent pace to as high as a 3.4 percent rate as of November.