The economic direction for 2017 is not clear cut, but I can state rationally: The economy will definitely be up, but the degree will be impacted by the residual effect of potentially lower corporate taxes on consumer and, more importantly, CEO confidence. Overall, President-elect Donald Trump is pushing for a 15 percent corporate tax rate. The U.S. House of Representatives wants 20 percent. It could end up somewhere in between. In any case, directionally, it’s going to be lower. That is a top priority for all involved.
Of the companies we have spoken to, balance sheets are in a pretty good shape. From a Wall Street perspective, companies may continue to pay down debt or do a special dividend or buy back stocks. But almost to a person, every company said it is going to reinvest in the company. If you think about the things that require multiple years of visibility, it’s not just a one-off type. These companies are doing real reinvestments, such as building new buildings or product development. It’s not going to be the run-of-the-mill blocking and tackling.
The companies we have spoken to are in a much more stable and confident position going into 2017, although they are uncertain, and a lot of that has been driven by the election. Many companies had prepared lots of scenarios about what could happen, and suddenly none of them seem reasonable. They never really thought there would be a reasonable plan that rates would come down. There are a lot of companies thinking that way now.
Companies have been loath to rehire people or invest in capital because it’s been a never-ending set of circumstances. Each year, health care costs have gone up significantly. Taxes have gone up significantly. With regulation, you never know what’s lurking around the corner. From a pragmatic standpoint, you have to prepare for that because you just don’t know what that regulation will be.
The companies we’re talking to also expect that the tax codes will be simplified. A great example would be the acceleration of the depreciation of capital expenditures. Consider a building materials company that has a tax rate of about 30 percent and is a very heavily capital intensive business. They need a lot of equipment and rolling stock. Even taking advantage of the accelerated depreciation, tax turns to be a positive for them at about 25 percent. Even if taxes only go down to 20 percent, which is where the House bogey is, that would still be a significant positive for them.
That outlook is driving CEO confidence.
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Kathryn I. Thompson is a founding partner and CEO of Thompson Research Group, Nashville, Tenn. In addition to managing and setting the direction of the firm, Thompson also serves as director of research. She brings more than 15 years experience analyzing, modeling and advising mutual funds, hedge funds, pension funds and private equity investors.