The investment boom that began in 2016 is fading fast, quashing the never-realistic hopes of Republicans that the corporate tax cut had permanently transformed the economy for the better.

There’s good reason to believe that the tax cut had almost no impact on business investment. Rather, it was strong demand, especially for oil, that encouraged businesses to expand capacity. Now investment is softening along with aggregate demand.

A year ago, Republicans were predicting that their big tax cut for businesses would create a virtuous cycle of higher fixed investment, leading to higher growth rates lasting for years.

A month ago, White House economist Kevin Hassett was insisting that everything was still going as planned. He declared that companies were investing more in equipment, software and facilities, enough to propel U.S. potential growth from an anemic 2% to a stellar 3% or more.

As he often is, Hassett was too cheery.

Now, hopes that the investment boom would continue into 2019 are in tatters, victim to four factors that are dragging on the economy: reduced fiscal stimulus (including the shutdown), a weakening global economy, the uncertainty of Donald Trump’s trade policy and soft oil prices.

Capex plans scaled back

Those four interrelated trends are weighing on aggregate demand in the U.S. and global economies, forcing companies to scale back their investment plans. It’s already visible in the data and in surveys of business expectations.

It’s important to define terms from the start. When economists talk about “investment,” they aren’t talking about putting money into the stock market. They are talking about building and maintaining productive assets that will continue to create value for years.

There are three broad classes of fixed investment: structures, such as factories, oil wells and housing; equipment, such as machinery, airplanes and computers; and intellectual property, such as software, new drugs, and blockbuster Hollywood movies.

Also read: The 15 U.S. companies that are investing the most in tomorrow’s big ideas

Businesses invest when they believe demand for their products will rise. Right now, fewer companies are confident of that future revenue. Most of the leading indicators of demand are slumping as the new year begins.

Surveys of manufacturing executives show that the giddy optimism of early 2018 has turned to caution. The new orders component of the ISM manufacturing index, for instance, plunged 11 points in December. Company guidance, U.S. regional surveys and global purchasing managers surveys are telling the same story: Companies are scaling back their plans for capital spending.

Economists at Morgan Stanley say their capex plans index (which is based on the regional Fed surveys of capital-spending expectations) has fallen in eight of the past nine months to the lowest level in a year.

“The continued softening in the index indicates restrained capital spending activity in 2019 as the shine of tax stimulus fades, and slower global growth, uncertainty around trade policy, and tighter financial conditions weigh on investment plans,” said Morgan Stanley economist Molly Wharton in a note to clients.

Hard data also show that capital spending is softening. Real business investment surged at a 10% annual pace in the first half of the year, but slowed to 2.5% in the third quarter. Core capital equipment orders and shipments slowed through November, and private nonresidential construction spending has also weakened.

Unfortunately, the government shutdown means this key data isn’t being reported or collected. It’s never a good time to fly blind, doubly so now.

Impact of oil prices

There’s something else going on besides weak aggregate demand: The impact of oil prices on U.S. investment is underappreciated.

It used to be that changes in oil prices mainly affected consumption — lower prices boosted the economy by making energy consumers richer, while higher prices frequently led to recessions. But since the fracking revolution earlier in this decade, changes in oil prices have become highly correlated with changes in investment.

Traditional oil production is based on long-lasting projects requiring huge investments of hundreds of millions of dollars. The analysis of the profitability of, say, an offshore drilling project doesn’t depend on spot crude oil prices

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but on prices expected for the duration of the project’s life. Temporary fluctuations in oil prices won’t affect this kind of investment.

But producing oil from shale is different in an important way: The investments are much smaller (less than $10 million per well), production can ramp up quickly, and the productive life of any well is much shorter. This means the profitability of investing in a shale-fracking project depends on expected oil prices over the next few years.

That creates a lot of volatility in oil-field investment. High prices attract a lot of investment, but when prices fall, as they did in 2014 and 2015, investment collapses. The dip in U.S. growth rates in 2015 and 2016 was largely due to the impact of lower oil prices on business investment.

Oil accounted for all growth

After a study of county-level economic data, Seth Carpenter, chief U.S. economist at UBS Securities, concluded that the increase in oil prices was responsible for much of the rebound in fixed investment in 2017, including investments in drilling equipment, storage tanks, pipes, machinery, vehicles, worker housing, and the equipment needed to supply the required sand and water.

Alexander Arnon of the Penn Wharton Budget Model estimated in a blog post titled “The Price of Oil is Now a Key Driver of Business Investment” that firmer oil prices accounted for almost all of the growth in investment in 2018.

Dallas Federal Reserve

Most oil investments aren’t profitable if the price falls much below $50 a barrel.

Unfortunately, oil prices have fallen again. Oil prices, which were near $70 in October, fell to $43 in mid-December and are now around $52. That’s right at the midpoint of profitability for most fracking projects, according to the Dallas Fed’s Energy Survey.

“The current level of oil prices puts energy investment on a cusp,” wrote Carpenter of UBS. “Further declines in the price of West Texas Intermediate are likely to have a substantively negative effect on energy’s contribution to U.S. GDP.

Manufacturers in the Dallas and Kansas City Federal Reserve districts have noticed, Morgan Stanley’s Wharton points out. “Declining oil prices are a concern going into the first quarter of 2019,” one fabricated metal product manufacturer told the Dallas Fed in December. About half of energy firms in the district have lowered their capital spending plans for 2019.

Likewise, oil and gas drilling activity in the Minneapolis Fed district “slowed notably recently in response to a rapid decline in the price of crude oil,” according to the latest Beige Book. “An industry contact reported that expectations for capital expenditures in the Bakken oil patch have shifted downward dramatically.”

The incentives in the 2017 tax cut had almost nothing to do with the investment boom we saw in 2017 and 2018, which helps explain why many corporate executives and macro-economists don’t think the tax cut transformed the economy at all.

For instance, IHS Markit is predicting that U.S. gross domestic product will fade from 2.9% in 2018 to 1.4% in 2023. The Federal Reserve, the Congressional Budget Office, the IMF and other forecasters agree that the tax cut was a temporary jolt, not a game-changer.

The U.S. economy needs a higher rate of productivity if we want living standards to improve. The tax cut didn’t change the weak trend in business investment. Maybe it’s time to invest more public money into transportation, alternative energy, education and health care to increase the nation’s capital stock and boost our growth rate.

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