During the first three months of 2018, the economy was whacked around like a pinball.
April 27, 2018 – NY Times
The economy grew at an annual rate of 2.3 percent in the first quarter, the government reported Friday, offering a preliminary glance at how last year’s sweeping package of tax cuts is affecting consumers and businesses this year.
The stock market took investors on a giddy up-and-down ride. President Trump imposed tariffs on allies and rivals alike, stoking fears of a trade war. And the revamped tax code shifted business incentives and started to put more money in workers’ paychecks.
Still, the economy ended up puttering along just a bit above the average yearly growth rate that it had registered since the recession ended nearly nine years ago.
While the pace is equal to the performance for all of last year, it is below the 2.9 percent annualized rate recorded in the fourth quarter of 2017, and short of Mr. Trump’s goal of at least 3 percent. Most forecasters, however, expect quarterly growth to float around the 3 percent mark for the rest of the year.
“This is not too bad,” said Carl R. Tannenbaum, chief economist of Northern Trust in Chicago. “The 2.3 percent figure is moderately encouraging.” Economists had expected economic growth to ease in the quarter.
“The rest of 2018 seems well assured given the substantial support that is going to come from government fiscal policy,” Mr. Tannenbaum said, referring to the $1.5 trillion cost of the tax cuts.
He noted, however, that “longer term, the immediate benefits of tax reform will fade, and what we’ll be left with is the bill.”
Economists on Wall Street and in Washington have repeatedly warned that the economy’s upward streak is unlikely to extend beyond the next year or two. The nation’s debt has topped $21 trillion and is growing, a level many view as unsustainable. And if the Federal Reserve follows through on its plan to raise interest rates, the cost of paying off that debt will grow larger.
In the longer run, the Fed expects real annual growth in the United States to fall to 1.8 percent. The Congressional Budget Office’s 10-year outlook comes to the same disappointing conclusion.
Expectations about the first-quarter figure had fluctuated as pieces of the puzzle emerged. Imports fell and exports rose more than expected, narrowing the merchandise trade deficit for the first time in six months. Orders of durable goods remained sluggish, but revived somewhat as commercial aircraft orders surged in March. And although consumers continued to express a lot of confidence, they pulled back on their spending.
Holiday shopping in the final quarter of 2017 had revved up consumer spending — which accounts for more than two-thirds of the nation’s economic activity — to 4 percent. Businesses responded by replenishing depleted inventories. But the shopping surge receded when the new year started; consumer spending grew only 1.1 percent in the first quarter.
Although the tax overhaul promised to increase take-home pay, its effects may have been blunted for several reasons, including the time it took for the Internal Revenue Service to produce updated withholding tables and for payroll managers to adjust their systems. A poll of registered voters done in April and released this week by Politico/Morning Consult found that only about a fifth of those surveyed were noticing more money in their paychecks.
“I think the fact that we didn’t see a big spurt in spending after the tax cut suggests it’s either too early in the game or consumers are going to continue to be a bit cautious,” said Kathy Bostjancic, chief United States financial economist at Oxford Economics. Nonetheless, she added, “I think there is a legitimate question as to how much of the tax cuts get saved to pull down debt, and how much actually gets spent.”