U.S. Economy’s 3% Spurt Emboldens Tax Cut Supporters (and Critics)

 

The United States economy is showing increased signs of resilience.

The nation’s gross domestic product, a key indicator of economic strength, expanded at an annual rate of 3 percent in the third quarter, the Commerce Department reported on Friday. The expansion defied concerns that hurricanes in Texas and Florida would put a damper on output.

Republicans called the report a sign that businesses were already spending more in anticipation of a corporate tax cut, and evidence that the economy could grow faster over the long term than currently forecast.

“If you look at the G.D.P. data, it’s clear that is a major reason,” Kevin Hassett, the chairman of the White House Council of Economic Advisers, asserted on Friday.

Many economists, however, are reluctant to give Congress or the administration too much credit for the economy’s trajectory.

 

 

“There hasn’t been anything concrete in terms of spending or tax cuts that we can point to that’s fueling the acceleration,” said Scott Anderson, chief economist at Bank of the West in San Francisco. If anyone deserves credit for the good news, he said, it is the Federal Reserve chairwoman, Janet L. Yellen.

G.D.P. Change
Annual rate of change in the gross domestic product, based on quarterly figures adjusted for inflation and seasonal fluctuations.
The economy is experiencing its fastest growth spurt in two consecutive quarters since 2014, after hitting 3.1 percent in the spring, a level that prompted President Trump to suggest that “we’re really on our way” to sustaining that pace year-round. “On a yearly basis, as you know, the last administration, during an eight-year period, never hit 3 percent,” Mr. Trump said during a speech in Missouri in August.

But economists say it is highly unlikely that growth for the year will reach 3 percent. The first quarter was tepid, and projections for the current quarter hover around 2.8 percent.

With legislation embodying the party’s tax proposals expected next week, the figures released on Friday also highlight the fine line Republicans are walking in selling their policy: They are celebrating faster growth while arguing that tax reform is needed to accelerate it further.

Representative Kevin Brady, Republican of Texas and the chairman of the House Ways and Means Committee, said in a statement on Friday that “our economy produced solid growth last quarter” and went on to say that tax reform was a way to “continue this growth” and “reinvigorate America’s economy.”

On Friday, Mr. Hassett and the Council of Economic Advisers released projections of how one prospective provision of the tax plan — a reduction in corporate tax rates to 20 percent from 35 percent — would affect economic growth. They said it would expand output by 3 to 5 percent over the long run, a period left unspecified.

The complication is that faster growth could undermine the party’s case that tax cuts are needed to add fuel to an economy that is already running with low unemployment — and it could lead the Federal Reserve to increase interest rates more quickly, which could dampen the effects of any tax bill.

Liberal economists said the report showed the success of Ms. Yellen at the Fed and undermined the case for the Republican tax bill. “The underlying trend in G.D.P. growth is clearly telling us two things,” Jared Bernstein, a former economic adviser to President Barack Obama who is now at the Center on Budget and Policy Priorities, said by email. “Keep on rockin’ steady with Yellen at the Fed, and there’s no need for a big, wasteful tax cut.”

The Fed, judging that the economy is growing about as fast as it can, is on course to raise its benchmark interest rate in December to a level Fed officials have described as likely neither to encourage nor to discourage growth. The Fed’s plans do not reflect the potential economic impact of a tax cut.

Aside from the details of the legislation, the Fed’s reaction may also depend on its leadership. Mr. Trump is expected to announce next week whom he will nominate to lead the Fed after Ms. Yellen’s term ends in early February.
The growth figure released on Friday was the government’s first estimate of economic output for the quarter, and it will be revised twice. Economists initially expected that Hurricanes Harvey and Irma would deal a blow to the country’s steady growth — a prospect reinforced by a net job loss in September — but became more optimistic in recent weeks.

After the shock dissipates, the recovery from an extreme weather event can help the economy by creating new reasons for consumer spending, which represents roughly 70 percent of national output. After the damage is done, people must often rebuild their homes or replace their cars, an effect that began to show up in the third quarter and will most likely continue through the end of the year.

“If you don’t go out to eat during a hurricane, maybe you bought plywood for your house,” said Robert Dye, chief economist at Comerica Bank. “If you have the insurance and support, that tends to be a stimulus to the economy.”

The destruction wrought by the storms was outweighed by the continued spending of consumers and businesses. The job market is lively, and the stock market has rallied to record highs. Chief executives and consumers are more confident than they have been in more than a decade, recent surveys show.

“There are no real headwinds to growth for the first time since the expansion began,” said Mark Zandi, the chief economist of Moody’s Analytics. “We are at full employment and we are in full swing; let the good times roll.”

Spending on equipment increased at a rate of 8.6 percent, as companies poured money into capital improvements. One reason companies may be investing more in their business is that the labor market has tightened and wages are rising.

“Businesses are going to be looking for more ways to produce than just adding bodies,” said Mr. Anderson of Bank of the West.

Personal consumption, although down from the previous quarter, grew at a 2.4 percent rate, and nonresidential fixed investment, a measure of business spending, expanded at a robust 3.9 percent. Mr. Zandi said the numbers were “a sign that consumers are hanging tough.”

At the same time, with a weak dollar making American goods more competitive abroad, international trade contributed positively to output for the third quarter in a row. Imports decreased.

The weak dollar through much of this year has been a boon to exporters like David Ickert, vice president for finance at Air Tractor Inc. The company, which is based in Olney, Tex., a town of about 3,100 people west of Dallas, makes crop dusters and forestry firefighting planes for markets including European countries along the Mediterranean Sea, sub-Saharan Africa and South America. Half of its sales are international.

Chasing Growth
The United States has been a pace setter among developed economies, but Europe is no longer a laggard.

Annual rate of change in G.D.P.

“Things are picking up — I sense it in Europe,” Mr. Ickert said. He emphasized that the positive impact of trade at a broad level filtered down to rural communities. “Trade helps create and sustain jobs in small-town America with a small business,” he said.

The American economy has performed considerably better this year than in 2016, when it grew at a halting 1.5 percent. And things have been looking up, economically, for much of the world, which is enjoying a rare moment of widespread expansion. The International Monetary Fund upgraded its forecast for the pace of world growth twice this year.

“This is happening globally,” Mr. Zandi, the Moody’s economist, said. “There isn’t a single major economy that is in recession.”

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