By Theo Francis and Ben Leubsdorf 

Exactly how well is the tax cut working? U.S. economic activity is on a solid trajectory this year, and overall growth is on track for a strong second quarter after a modest slowdown in the early months of 2018.

But it remains unclear how much credit goes to the tax law. Both critics and supporters say it will take months or years to draw conclusions on the law's effect.

Meanwhile, here are a dozen gauges that help reveal how well the changes are aiding businesses, workers and the broader economy.

What measures are you watching to understand how well the tax overhaul is working? Let us know.

When companies spend more on factories, vehicles, equipment, computers and software, it shows up as a rise in capital spending, which has picked up in recent quarters. That improvement could reflect new tax-law provisions intended to encourage business investment, including quicker deductions for some purchases, as well as lower tax rates and other changes that make lower-margin investments more attractive. Still, many economists think taxes are only one of several forces at work.

A rebound in global oil prices may have had a bigger impact on capital spending, driving a recovery in drilling and other energy-related investment that started before President Donald Trump took office. The coming months and years will show whether other sectors ramp up their capital expenditures in response to the tax cuts.

Taxes are an expense for business, so tax cuts lift the bottom line mechanically. They can also spur spending by consumers and businesses, increasing sales and profits. A measure of after-tax corporate profits jumped in the first quarter after dipping in the fourth quarter.

Various one-time effects of the tax law, including accounting adjustments for publicly traded companies, make it difficult to draw conclusions about the underlying trend for now.

Overall, however, profits have largely been growing along with the rest of the economy. Profits as a proportion of overall economic output -- the nation's gross domestic product -- haven't changed much so far.

Large publicly traded companies have funneled much of their tax savings into increased share repurchases. Analysts and economists caution that increased investment and hiring from expansion take more time to implement. Tax cut advocates also argue that buybacks allow investors to reallocate capital to companies with potentially profitable investments and away from those with more limited opportunities.

American workers' disposable income -- after taxes, adjusted for inflation -- jumped in the first quarter as the government withheld less from their paychecks and some employers paid out one-time bonuses. Since then, income has risen at rates similar to before the tax overhaul, leaving open the question of whether the legislation will continue to drive wages higher.

It isn't yet clear what households have done with their extra income, since inflation-adjusted consumer spending actually fell in the first couple of months of the year, before jumping in March and April.

The share of disposable income saved or used to pay down debt rose in the first two months of the year, before dipping in March and April. Still, future revisions to income, spending and saving data based on more complete and accurate information could change our understanding of these developments.

One possible reaction to bigger paychecks: Americans heading out to spend more on restaurant meals and physical goods. Retail and food-services sales jumped in May, continuing a strong spring trend.

Consumers are certainly more confident about the economy's current state than they were a couple of years back.

They also remain upbeat about the future -- though that optimism has remained in check.

As so often happens these days, politics clouds the picture. How consumers feel about the current state of the economy, and the future, differs starkly by political affiliation -- a split that took shape with President Trump's election and hasn't changed much since the tax overhaul.

--

Richard Rubin

and

Michael Rapoport

contributed to this article.

Write to Theo Francis at theo.francis@wsj.com and Ben Leubsdorf at ben.leubsdorf@wsj.com

(END) Dow Jones Newswires

June 18, 2018 08:14 ET (12:14 GMT)

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