The nation’s economic growth slowed in the first three months of the year despite the large tax cuts kicking in, raising new questions about whether the U.S. can reach the levels President Donald Trump has promised.
Total economic output, also known as gross domestic product, expanded at a solid 2.3 percent annual pace in the first quarter, the Commerce Department said Friday.
The figure, which was higher than analysts had expected, is down from 2.9 percent in the fourth quarter of last year.
Consumer spending dropped to its worst level in nearly five years after an unusually strong end of 2017. It was up 1.1 percent in the first quarter compared with 4 percent in the fourth quarter of last year, which was the best in three years. A key measure of business investment also slowed after a strong fourth quarter, but remained robust.
Friday’s data are the initial of three government estimates so it’s possible the figures will be revised up in the coming weeks. Economists expect stronger growth in the second quarter of this year and it will take months, if not years, for the full impact of the tax cuts to flow into the economy.
Trump has said his policies, particularly the tax cuts, would raise sustained annual economic growth up to 3 percent or higher from the sluggish 2 percent level that has plagued the recovery from the Great Recession.
But his administration has fallen victim to a problem that afflicted the Obama administration before it – unusually slow first quarters that helped keep annual economic growth below 3 percent.
First-quarter growth has been much lower than other quarters in recent years, leading economists to speculate there are problems with how government statisticians factor in seasonal adjustments. From 2007-16, first-quarter growth has averaged 1.3 percentage points below growth for the year as a whole, according to a July Federal Reserve study.
Still, Trump has promised that the tax cuts, which will increase the deficit by $1.5 trillion over 10 years, would add “rocket fuel” to the economy – and by implication, overwhelm whatever statistical problems are affecting the data.
“The economy now has hit 3 percent,” Trump told reporters Dec. 16 as Congress finished work on the tax-cut legislation. “Nobody thought it would be anywhere close. I think we could go to 4, 5 or even 6 percent, ultimately.”
On Tuesday, Trump told reporters at the White House that “the economy has been really incredible.” He cited record-low unemployment in California and seven other states in March in a jobs recovery that began in 2010.
After topping 3 percent in the second and third quarters of 2016, economic growth slipped to 2.9 percent in the fourth quarter.
The tax cuts, focused on corporations and the wealthy, kicked in on Jan. 1, and employers adjusted worker paychecks to reflect the lower tax rates in February.
But two recent polls have shown a slim majority of Americans said they haven’t notice an increase in take-home pay.
Kevin Hassett, chairman of the White House Council of Economic Advisors, suggested this week that could be because so many workers have direct deposit and don’t scrutinize their pay as closely as when they received paper paychecks.
“There’s some speculation that the extra money, which is definitely there, might take a little longer for people to turn into consumption,” he told reporters at a breakfast Thursday sponsored by the Christian Science Monitor.
But the problem could be that the bump in pay for average workers isn’t as big as supporters of the tax cuts have promised.
The White House has estimated average annual household income would increase $4,000, factoring in economic growth and companies using their tax savings to increase wages. But the nonpartisan Tax Policy Center estimated that the figure would be $1,600 this year – and just $930 for middle-income households.
Acknowledging that forecasters expected economic growth to slow in the first quarter, Hassett said he remained confident the U.S. still would hit 3 percent growth for all of 2018. Economic growth was 2.3 percent for 2017, up from 1.5 percent the previous year.
“If it ended up being a 2.9 year, a tenth off of 3, that would still be a good year,” Hassett said of 2018.
But Trump and Republicans strongly criticized former President Obama for not having a single calendar year in which economic growth hit 3 percent. He presided over growth of 2.9 percent in 2015 and there were three 12-month periods during his administration in which growth exceeded that level.
The first of those periods was from October 2009 through September 2010. Then there were two overlapping periods – from April 2014 through March 2015 and from July 2014 through June 2015.
The annual Economic Report of the President, released last month, forecast 3.1 percent growth this year, increasing to 3.2 percent the following year. Growth would be at least 3 percent a year through 2024. But those forecasts are higher than others. The Congressional Budget Office recently estimated 3.3 percent growth this year, dropping to 2.4 percent in 2019 and 1.8 percent the following year.
Federal Reserve policymakers expect 2.7 percent growth this year, declining after that. The International Monetary Fund had a similar forecast.
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