The Republican tax reform package looks like a winner for manufacturers, from lower taxes to the immediate 100 percent expensing in the year equipment that goes into service.
People quoted in the story in this week's Plastics News have a lot of optimism, but this early in the year, not a lot of specifics.
We will revisit this story as the year progresses. Tax reform has so many angles we could devote a whole issue of Plastics News to the topic. Already, in the special report on mergers and acquisitions, we ran a story by senior reporter Frank Esposito saying how the tax changes could drive up M&A valuations.
This week's story, by Bill Bregar and Audrey LaForest, outlines obvious early beneficiaries of the new depreciation rule: machinery manufacturers. They are bullish. Tax reform will be the big story at NPE2018. It could mark one of the best NPEs ever from the standpoint of attendees buying machines, not just kicking the tires.
That said, there are some points to think about:
• The 100 percent depreciation runs for five years, from 2018 through 2022. That means that some sales of equipment and technology won't happen this year.
Bob Confer, vice president of the family-owned blow molder Confer Plastics Inc. in North Tonawanda, N.Y., said he is looking to replace some of his older machinery maybe in 2019 or 2020. "We do have some 1970s vintage machinery that does the job for us, but we could probably do much better with modern technology," he said.
Access to more capital also could prompt the company to buy more robots at the business which blow molds large consumer and recreational products for the pool and spa market and does custom molding.
That shows some companies will spread out the business over the five-year period. This also is good news for the machinery segment, spreading out the demand.
• Then there's the first poll of 2018 on the Plastics News website. We asked: "What will your company do with a federal tax break?" Twenty-one percent of those responding said they will invest in equipment, 12 percent planned to give raises, and 8 percent to hire more workers. But the biggest number — 58 percent — checked off "nothing will change."
Obviously, our polls are unscientific. And to be fair, the poll came out Jan. 2, when people still had not focused on the details of the tax reform. But clearly, some processors will wait before pulling the trigger on investments. Accountants have no doubt been working overtime to show how the changes impact manufacturing companies around the country. There's still a lot to digest.
Confer Plastics employs 250 people. Bob Confer said smaller processors like his should "receive great benefit" from lower taxes.
"You could be talking about people having anywhere from tens of thousands to hundreds of thousands of dollars kicking around every year that they could invest in machinery," he said. "They could invest it in machinery. They could invest it in new molds. They could develop new product lines, and ultimately, that works out to be greater employment and probably greater wages."
• The plastics industry — and the entire U.S. economy — also will benefit as consumers have more money to buy things.
As this week's story makes clear, it will take a few months to see what people do with the extra money in their paychecks from the tax reform. But history shows the American consumer will spend rather than save. Higher consumer spending — and rising wages — mean a lot to the U.S. economy. Companies don't invest in new capacity just because of a tax break, even a major one. They look for increases in demand.
Plastics manufacturing and machinery sales have already been pretty good. Will tax reform overstimulate the economy?
For machinery, the first impact will likely be replacement equipment sales as processors move to update their fleet. Machinery executives say replacement sales have been happening the last year or two, and the move should now accelerate.
There's always the chance that, if it picks up very quickly, equipment delivery schedules could get pushed out. In past boom periods, there have been shortages of some components. To be safe, machinery suppliers should start to increase their inventories.
Plastics economist Bill Wood thinks the tax reform is a positive move and will make a good situation even better by putting more money in circulation. But he said, "I'm worried about it being a little too good. I don't know that's going to happen, but if the growth is too fast, that just sets us up for a downturn at some point in the not-to-distant future."
Conditions were good in the plastics industry already, Wood points out. Interest rates are low and "the economy was expanding in the United States and around the world.
"So did we really need fiscal stimulus? Did the plastics industry need it? I would argue probably not," he said.
But the tax reform was not designed to be a classic "stimulus" measure, perfectly timed to jolt a weak economy. Certainly, lower taxes could help the U.S. economy come out of its modest rate of growth. But the Republicans and President Donald Trump wanted landmark tax reform as a move to give more money to businesses and consumers, instead of the U.S. government.
Let's see how manufacturers run with it.