Tax reform was supposed to make the U.S. economy great again. Days of the gross domestic product expanding at an annual rate of pre-Great Recession levels of 3% or better were to return. But that hasn’t happened so far.
Let’s look at the GDP in the first quarter of the year, the beginning of when tax reform took effect. The GDP expanded again, at a 2.3% annual rate. But that’s down from a rate of 2.9% in the final quarter of 2017, before tax reform took effect.
So what happened? The biggest contributor to the economy, consumer spending, slowed its increase to an annual pace of 1.1%, down from a 4% annual growth rate in the fourth quarter, according to the first of three Commerce Department’s GDP estimates, released in late April.
“As a consumer-based economy, the fastest way to derail the U.S. economy is a slowdown in overall spending patterns,” said Stifel Chief Economist Lindsey Piegza.
To be fair, the U.S. economy has historically experienced weaker growth at the start of a new year compared to the previous quarter, as consumers spend amid the holiday season. And in fact, this was the best first-quarter GDP performance since the first quarter of 2015.
But it was no better than last year’s 2.3% average rate of expansion.
In other words, so far, the economy isn’t doing measurably better than before the tax laws took effect.
“Tax reform ... was expected to mitigate that typical pattern [of lower first quarter performance],” Piegza said. “What we saw instead was consumers spending in anticipation of a possible bump in after-tax take-home pay – an increase which for many failed to materialize into a meaningful increase in income and thus, offered minimal support to first-quarter consumption.”
In other words, the backbone of the American economy, consumers, so far hasn’t seen that big of a boost in pay from lower tax rates.
Don’t get me wrong – there were winners in this tax reform package. Large companies, including many in trucking, saw their maximum tax rate drop 40%. The result has been greatly increased quarterly profits. And while this is good for their businesses, there are questions as to how much it will translate into faster growth for the economy, especially in light of first-quarter GDP performance.
The average Joe is getting little federal tax relief as the cost of living continues to rise. While surveys show consumer confidence/sentiment is high, the overall gains in the surveys are for those at the higher end of the income ladder.
Looking ahead, the Federal Reserve is expected to increase interest rates more this year and into 2019, raising borrowing costs while cutting into spending. Plus there are indications consumers are going to pay higher prices for goods due to increasing freight rates triggered by tight capacity, coupled with higher retail inflation. I wouldn’t bet the economy is going to kick into high gear with sustained growth of 3% or better.