Dear Garden State Trust:
Are the tax cuts enacted last December having the hoped-for impact? How is the economy doing?
Too soon to say, but we have a number of good portents. Gross Domestic Product was up 2.2% in the first quarter. In the last four years, the first quarter of the year has tended to be disappointing, with an average growth of just 1%, so 2.2% is quite strong by comparison.
Even better, the profits of the companies in the S&P 500 were up a remarkable 26.3% in the same period. The strong global economy, a decline in the value of the dollar, and the cut in the corporate tax rate all contributed to this good performance. However, another contributor was the record buyback of $178 billion in shares. Because profits are reported on a per-share basis, the buybacks create an artificial lift in the percentages.
A broader measure of corporate profits is created by the Commerce Department. This figure excludes foreign operations, and it includes all U.S. companies, privately as well as publicly held firms. The Commerce Department also includes any one-time charges to earnings that are usually excluded from the S&P 500 numbers. The government measured profit growth at just 0.1% in the first quarter. What’s more, were it not for the reduction in the corporate tax rate, profits would have fallen by 6% instead of growing.
That shows that the benefits of the tax cuts are flowing to businesses as intended. Whether that will translate into sustained above-average economic growth is still an open question.
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