The government’s first estimate of economic growth at the beginning of 2018 was better than expected: GDP increased at a 2.3 percent annual rate in the first quarter, the Commerce Department said Friday — above Wall Street estimates of 2 percent.
This first read on economic growth is, for better or for worse, being seen by some as a test of the efficacy of the Republican tax cuts. The Trump administration has promised 3 percent GDP growth or better, due in large part to the tax cuts that were passed late last year. At that rate, sustained over many years, the tax “plan will pay for itself with growth,” Treasury Secretary Steven Mnuchin said last week, not for the first time.
The Commerce Department report contains plenty of mixed messages. On the one hand, economic growth slowed from the 2.9 percent rate recorded in the fourth quarter, despite the tax cuts taking effect in January.
On the other hand, the growth was indeed stronger than expected. The first quarter typically sees slower growth due to weather and post-holiday cutbacks, so the falloff was no surprise, and supporters of the tax cuts have room to argue that the better-than-expected results were driven at least in part by the tax cuts.
But the signals are far from clear, and the data can be sliced and diced to support any number of conclusions.
For example, Greg Ip of The Wall Street Journal said in a series of tweets Friday morning that the data from the fourth quarter was likely distorted by post-hurricane vehicle purchases and home repair; excluding auto sales and residential investment results in stronger growth numbers for the first quarter. Making other adjustments to the data related to fluctuations in the oil market produce a growth estimate close to the 3 percent Republican target.
At the same time, some of the data point to an economy that is still below the 3 percent growth level. J.P. Morgan economist Michael Feroli said that “much of the upside surprise in the headline number was accounted for by stronger-than-expected federal government spending,” which he expects will be revised lower. Former Obama economic adviser Jason Furman noted that the first quarter number was boosted by a “volatile inventory buildup” that will not likely be repeated.
Looking at the data as a whole, Bloomberg’s Sho Chandra concluded that “the results underline the difficulty of achieving President Donald Trump’s goal of 3 percent sustained growth, despite corporate and individual tax cuts that went into effect in January.”
Why it matters: Ultimately, a single data point, itself an initial estimate, covering a few months can’t tell us definitively about the success or failure of the tax cuts, or anything else for that matter. The question itself is important — Nick Timiraos of The Wall Street Journal tweeted that this “disagreement matters because you end up with large deficits if Trump is wrong” – but one report isn’t going to settle the issue.
The bottom line: The great majority of economists agree that the GOP’s fiscal stimulus will boost growth in the next year or two; the question is what happens after that. And we won’t know the answer to that question for several years at least. As Greg Ip put it in the conclusion to his “tweetstorm” on the GDP report, “Bottom line: Trump promised 3% sustained supply-sided growth; a demand-driven burst lasting from 2017 to 2019 doesn't qualify. It will be a while before we know if the U.S. got the former, not just the latter.”
A final point: The Commerce Department report makes it clear that its initial report is “based on source data that are incomplete or subject to further revision by the source agency,” and a second take on first quarter growth will be released on May 30. Joseph Lavorgna, chief economist at the investment bank Natixis, points out that GDP revisions are typically quite large, more than a full percentage point on average since 2000. That means that the range for the revised growth estimate is between 0.8 percent and 3.8 percent — a large enough spread to conclude that the initial report is little more than “statistical noise,” Lavorgna wrote in a note to clients Friday.