So what else is new?

So what else is new?  For all the talk on trade, there is more going on in the US economy than just that. The further upward revision to Q2 GDP this week to a 4.2% annualized rate (from 4.0%) can tell you that. A big source of fuel for growth is in repatriation of foreign earnings. It is easy to forget important issues of several months ago in the 24-hour news cycle that have yet to come through the system.  A big item in the recent tax legislation passed last year was a significant change in how US corporations with foreign subsidiaries are taxed on earnings made abroad.  Prior to the change, certain foreign-based income (subject to several complicated rules) was taxed at the statutory corporate tax rate (then 35%) only if it was brought home. It was not taxed by the US if held offshore. That resulted in a massive build-up of cash overseas. Under the Tax Cut and Jobs Act of 2017, the US modified the foreign corporate income tax framework and in doing so enacted a one-time “toll” on accumulated earnings not previously taxed since 1986 at lower rates (15.5% on cash and 8% on non-cash items). This toll essentially removes any hurdle to bring that cash home since the tax would be paid (albeit can be paid over an 8 year period).  With the US economy buzzing at a 4% clip and lots of investment opportunities, why not bring the cash here? While it is a complicated rule change (the IRS published clarifications earlier this month), companies have already started doing just that.


One of our research providers, Strategas, parsed the numbers deep in the Q2 GDP report to get an early estimate of how much cash companies have brought home in the first six months of 2018.  They estimate the number at $500bln!  For context, that amount is about 2.5% of GDP. And how much cash could possibly find its way home?  It is estimated that there is about $1.7 trillion dollars held overseas (and another $900bln in non-cash assets should they liquidate over time). The last time there was a repatriation tax holiday in 2005, the total estimated cash available overseas totaled $600bln. This returning cash, and importantly what corporations decide to do with it, can provide significant ongoing economic support that will be spread over several quarters as it takes time to get it to work.


That said, shovels are already in the dirt.  Capital expenditures (CapEx) as of the second quarter are growing at a 12.9% annualized pace.  CapEx is a gift that can keep giving.  If good projects are deployed, it will create a virtuous circle that will boost growth and productivity at the same time and thus keep inflationary pressures under control. CapEx and its knock-on growth impact is one reason the Atlanta Fed GDPNow forecast tool estimates Q3 GDP to still be hovering above the 4% mark. It has also been good news for the stock market.  Some corporations decided to place repatriated cash right back in shareholder hands. The same research report suggests that shareholder yield (the combination of share buybacks and dividend payments) is back above 4.6% – keeping a decent spread versus interest rates which have crept up over the course of the year.  Again, that is good news for consumption (and the economy) as increased cash available plus increased confidence in wealth equals increased propensity to spend.  It will also equal earnings growth which supports valuation.  Altogether, it is an equation that is good for equity asset returns…and that would be good news too.