Critics of President Donald Trump’s tax law centerpiece — slashing the corporate rate — argued the savings wouldn’t spur big companies to expand dramatically. One year later, some key metrics show they were right.

For companies in the Standard Poor’s 500 Index, the profits they’ve made from sales this year through September — after accounting for production costs but before paying taxes — have been flat. But their net profit margins — which include the tax savings — have continued to climb. If they were spending more to hire workers and build U.S. factories, those net margins would be lower.

Before the pitchforks come out, put yourself in the shoes of a chief executive officer of a major company. The economy is in the ninth year of an expansion that’s already one of the longest in U.S. history, and in 2018 you get a big pile of money dropped in your lap. Does expanding make sense when you’re already worried about this being the top of the economic cycle?

For the average CEO, it didn’t. America’s biggest companies instead chose to protect their profits by using their tax savings to offset risings costs, including for labor, transportation and imports caught up in Trump’s trade disputes. While they may be politically unpopular after the president and GOP leaders promised their tax law would unleash expansion in the U.S., analysts see those moves as prudent.

“They have been criticized for not investing in America, but you don’t want them to make unproductive investments at the top of the cycle,” said Tim Drayson, head of economics for Legal General Investment Management, a money manager. The tax overhaul was a “one-off boost to earnings, whereas politicians were selling it as transformational.”

A slogan like “Tax cuts to save the bottom line” wouldn’t win over many voters. But that’s exactly what corporations did with the billions of dollars they received after the Republican tax law cut the corporate rate to 21 percent from 35 percent. And that helped to push the average net margin for SP 500 firms to its highest level since at least 1990, according to data compiled by Bloomberg.

The benefits of the tax cuts “have gone straight to the bottom line, as we had anticipated,” Maneesh Deshpande, Barclays Plc’s head of U.S. equity and global derivatives strategy, said in a research note last month. This came at the expense of spending more on items like capital expenditures and wages, Deshpande said.

The Trump administration continues to defend its tax law and the associated economic benefits. During a call with reporters on Wednesday celebrating the one-year anniversary of the overhaul, Council of Economic Advisers Chairman Kevin Hassett said capital spending was on track to contribute 1 percent to economic growth this year and survey data shows companies’ spending plans over the next six months to a year are “very strong.”

SP decline

Companies have also been spending on buybacks — another way to puff up earnings. SP 500 companies boosted buybacks during the first three quarters of the year by 49 percent to $577.9 billion compared to a year ago. Still, as a percentage of market value, the purchases are in line with previous years.

The overall effect of companies protecting profits and doing buybacks helped to drive the SP 500 to a record high in early September, only for it to sell off amid trade tensions and recession worries. Now the index is headed for its biggest annual decline since the 2008 financial crisis.

Expecting companies to unleash spending just because they got a tax cut isn’t how businesses operate, despite what they might tout in press releases. They generally invest based on market conditions, not goodwill or national pride. They expand when they see growth coming and pull back when demand wanes. Within the SP 500, cash flows are surging, but a lower percentage of that money is being spent on capital expenditures.

Take General Motors Co.’s response to market realities. The automaker’s plan to close U.S. factories and cut 14,000 jobs was driven by declining sales of some models and the decision to protect margins by maintaining operations in Mexico’s cheaper labor market. The automaker’s income tax expense was $366 million in the third quarter on $2.6 billion of profit, which equals a tax rate of 11.9 percent. GM has invested $22 billion in the U.S. since 2010, said spokesman Tom Henderson, who declined to provide additional comment.

Companies are also trying to use the tax cuts to gloss over disappointing results. After a weak third quarter, ATT Inc. CEO Randall Stephenson tried to re-focus investors away from an unexpected loss of subscribers to big gains in cash flow, which he said would mean more money for shareholder dividends and paying down debt.

“If you look at the cash flows for the quarter, I feel really good about the results,” Stephenson said on Oct. 24.

What Stephenson might not feel so good about: If ATT’s tax rate had remained the same, it would have paid $2.3 billion more in taxes through September of this year. That would have reduced its 20 percent gain in free cash flow to just a 1 percent increase.

Meanwhile, this year ATT has boosted buybacks by 25 percent, and has also said it will spend about $22 billion on capital expenditures, which as a percentage of sales would be lower than each of the past five years. Part of the decline may be the result of acquiring a business that had fewer investment needs. An ATT spokeswoman declined to comment.

‘Better to wait’

At home-improvement retailer Lowe’s Cos., operating margin narrowed by 20 percent this year — but by saving $671 million in taxes, the retailer was able to boost its net margin by 5 percent. At the same time, it canceled capital projects, shuttered weak-performing stores and laid off workers — all part of new CEO Marvin Ellison’s plan to increase profits after an activist investor pushed out his predecessor for lackluster results.

Still, the retailer said it plans to boost capital spending by about 30 percent next year. A Lowe’s spokeswoman declined to comment.

Beyond companies in the SP 500 Index, other surveys show capital expenditures have been disappointing. Nonresidential business investment rose 2.5 percent in the third quarter, the smallest increase since the final three months of 2016. While such spending picked up in early 2018 after plodding along for years, a string of weak reports raises questions about the outlook.

For economist Drayson, this all goes back to the timing of the tax cuts.

“From a pure economy basis, it would have been better to wait until the next downturn before doing this,” Drayson said.

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