Chalk that one up for empirical evidence in favour of confidence about the future and not low interest rates boosting capital expenditure. After Trump came to office, deregulation through executive action and (may be) ‘America first’ policies boosted business sentiment (check out NFIB Index of Optimism among small businesses). Corporations too are happier. Hence, despite interest rates rising, tax cuts are going into capex and not stock buybacks which is what Ben Bernanke achieved. One caveat: this is preliminary evidence.
This is what the ‘Small Business Economic Trends’ (March 2018) report says:
The Index of Small Business Optimism slipped in March to 104.7, 2.9 points below the February reading of 107.6, the second highest level in its history. The Index has been higher only 20 times of the last 432 surveys.
- Taxes received the fewest votes as the #1 business problem since 1982, falling from 22 percent reporting it as their #1 business problem in November to 13 percent in March.
- Labor quality remained the #1 problem for the third straight month.
- Reports of improved earnings trends were the second best since 1987.
- Reports of compensation increases held at the highest level since 2000.
- Reported job creation posted another solid gain, best since 2006.
- The net percent of owners reporting higher selling prices continued to rise, reaching the highest level since 2008.
Overall, the small business sector has responded very positively to the new management team and its economic policies, leading the economy to what appears to become 12 months of 3 percent GDP growth, much better than the eight years under the previous administration. [Link]
The post-Trump jump in sentiment among small businesses and its persistence has gone largely un-reported in mainstream media. One can bet the last dollar that it would have been prominently aired had the sentiment gone south.
Indeed, one can go to the extent of arguing that QE and extraordinarily low interest rates actually deflate confidence as the behavioural messaging of such unconventional policy is one of pessimism about future demand and hence deflation. Why would anyone invest in capex with such a bleak scenario? This elementary logic has eluded the highly qualified academics-central bankers.
In India, this is the message that the NDA government has failed to grasp throughout its four years. Even the PM is guilty of hurting confidence with his redistributive logic and the Kafka-esque tax department is still doing its more than fair share of the ‘good work’ of undermining confidence. The confidence so undermined is not showing up in data because data on capital formation in the non-financial corporate sector is garbage. Just check out the numbers:
These are the figures for investment in machinery & equipment (at current prices, 2011-12 basis) by private non-financial corporations:
These data make no sense. When everything else pointed to a drop in growth in 2012-13 and 2013-14, capex by non-financial corporations (pvt. sector) jumped more than 10%. Then there is a 15% jump in 2015-16 and in 2016-17. Just have to look at excise duty collections in those years, hiring intentions of the industrial sector and employment prospects as perceived by households to realise that these data are not credible.
Bad policy; bad data = bad political and economic outcomes.