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SBOI Records and Tax Cuts - September 11, 2018

The MI2 Partners team was profoundly and directly affected by the events on 9/11/01. Today, we remember those lost and honor those who served on that day and continue to serve today. We will never forget.


Today’s report on the NFIB’s Small Business Optimism Index opened with the proclamation, “It’s a RECORD!”, heralding the highest level ever for the overall SBOI. Underneath, “Capital spending plans were the highest since 2007 and inventory investment plans the strongest since 2005.” The trends we’ve highlighted before continue to play out as 89 percent of businesses trying to hire reported few or no qualified applicants, and sales posted a “very good number” and “Over 35 percent of the owners in construction, manufacturing, the wholesale trades and transportation reported sales volume gains. They are booming.” (Emphasis our own.)

But this month’s commentary expands beyond the survey numbers to offer some color. First, it assures the “worriers focused on the role of FAANG stocks”, that the Russell 2000 “began posting record gains as well, based on very favorable profit reports for small businesses”, and reassures everyone that “the small business engine continues to roar with the dramatic change in economic policies since November 2016”. Second, while the initial jump in the SBOI in late 2016 was “dominated by expectations”, “Now the Index is dominated by stuff that makes GDP grow”. Finally, the commentary concludes,

“Politics, rather than the strong economy and low unemployment, will continue to dominate the news. But this is not likely to have much of an impact on the level of economic activity which is on course to equal or surpass last quarter’s performance.”


One of the changes in economic policies mentioned above was the passage of the Tax Cuts and Jobs Act. The Whitehouse Council of Economic Advisers recently opined that the readings on wages were “particularly misleading during the past year when over six million workers have benefitted from the tax cuts in the form of pay raises, better benefits, and bigger bonuses”, which when combined with a PCE-based adjustment means that “real after-tax compensation growth is 1.9 percent over the same period.” For those in need of a grain of salt, we recommend Epsilon Theory’s analysis on both the why and the how of employment and wage data “theater”.

Whether or not workers have seen some concrete effects of the TCJA, there have been responses in other parts of the economy. First, the Federal Reserve reported on Corporations’ Repatriation of Offshore Profits, and found that over $300 billion was repatriated in the first quarter of 2018, and that these funds “have been associated with a dramatic increase in share buybacks”, “however, unlike buybacks, dividends were little changed.” And though there is some evidence of an increase in investments, “it is far too early to reach a definitive conclusion” on “any boost”. Moreover, if a recent paper from the NBER on Taxation and Innovation (controlled access) is correct, the TCJA could have widespread consequences, as it found “that taxes matter for innovation: higher personal and corporate income taxes negatively affect the quantity, quality, and location of inventive activity at the macro and micro levels.” However, they caution that “it is still an open question as to how the federal tax rate affects national-level innovations in the U.S.”