Apart from the fact that the Trump tax cut has blown US budget deficits out of proportions, and probably for years to come, people would want to argue that it has also done some good. It certainly has pushed the stock market up, as almost half of corporate profits that were repatriated went straight into share buy-backs. But at least for a few quarters capital expenditure has also grown – that is to say on a top-line basis, however.
Why is this important? The composition of capex has changed materially over the past few decades. In the late 1990s about half of business investments were still funnelled into the construction of infrastructure and industrial equipment, which caused the economic boom during the Clinton years that, to be fair, had its roots in Reaganomics and the supply-side program that was introduced by the former president in the course of the 1980s. About 1/3 of the funds found its way into technology and intellectual property then.
Compare these numbers to last year, when not even 1/3 of business investments were directed into old-fashioned infrastructure and industrial equipment but more than 50% into technology and intellectual property. It testifies to the generational shift away from physical investments and toward intangible ones. What a difference this scenario makes with China where infrastructure is top of the agenda and the Beijing government invests heavily into the future backbone of the country.
This shift in the composition of capital expenditure invariably also changes the nature of America’s economic growth story. You might call it old industry, or in China the zombie-like SoEs, but it is after all factories, construction and machinery that still tend to create jobs of the sort that Trump has so audibly been advocating to bring back to the homeland. Big tech that has been a key beneficiary of the Trump policies may have invested heaps but generally tend to eliminate those old-fashioned jobs.
And by the way, overall US capex numbers have recently been disappointing, as in companies are less inclined to put their earnings to work, reasons of which can be found in the current US trade policies and the gradual worsening of the geopolitical picture in general. So, despite this largest tax cut in US history Washington may have inadvertently contributed to predominantly tech companies taking their piece of flesh and to a continuation of the erosion of America’s infrastructure and industrial capacity.
The so-called job miracle under the Trump administration needs to be viewed in this very context. February’s payroll number growth of a meagre 20,000 versus forecasts of up to 200,000 may not have been a seasonal misprint. Growing hourly earnings were in fact predominantly measured within the labour-intensive and low-wage sectors where household budgets are tight in any case, and at the same time, the household savings rate jumped to a 3-year high of 7.6% in December…
… which might explain why demand is stalling and retail and personal consumption data fell off the charts at the end of the year. In other words, those advertised wages could not have led to higher inflation, to begin with. So, let it be told to the members of the monetary ivory tower club, the often cited Phillips curve does not work and probably will not work going forward, no matter how often it is being invoked. On the contrary, when labour costs rise too fast, businesses tend to stop hiring.
If you will, the wage dynamic is not only not leading to higher inflation, it may well be the reason for lower growth. In order to try to accommodate the masses of low-skilled and -waged workers, if that was truly was one of the Trump agendas, America might be well advised to focus on boosting the share of infrastructure and industrial spending again and allow for those employers to live a little and splash more on wage increases, which in turn might cause more of this desired inflationary effect.
Otherwise, decades of underinvestment there will keep a lid on hiring in this crucial employment segment and eventually rear its ugly head and turn out to be a longer-term burden for growth as the mismatch will grow further and the labour market keep clashing with blatant capacity constraints.
