Deutsche Bank are out with a bullish argument this morning, suggesting that the tax compromise is about to lead to a capex boom in the U.S., and the follow on of an employment surge.
From Deutsche Bank:
However, the ability of firms to depreciate 100% of capital expenditures over the course of the coming year bodes well for healthy business spending on capex, and this added tax benefit could lift real GDP growth another few tenths of a percentage point. The CBO has previously estimated that the effect of bonus depreciation on capital expenditures could increase output by 0.1 to 0.2 per cent and employment by 100k to 200k jobs.
Just last week, Richard Koo of Nomura questioned whether or not this tax move would have any real impact. The reason: businesses are not confident in the future spending intentions (4-5 years) of U.S. consumers or businesses and, thus, are too fearful to invest. This ties into his broader position on the balance sheet recession, which shows firms and individuals in a post asset price collapse scenario choosing to pay down debt and form fortress balance sheets, fearing debt.
Deutsche Bank argue that right now, corporate balance sheets are in great shape with free cash flow at an all time high.
But why does that matter if businesses still have no confidence in their consumers?
The visual explanation for what Deutsche Bank expect to happen, based on historical data:
Photo: Deutsche Bank