U.S. economic growth slows despite Trump’s tax cuts

Reporting from WASHINGTON —  The nation’s economic growth slowed in the first three months of the year despite large tax cuts kicking in, raising new questions about whether the U.S. can reach the growth levels President Trump has promised.

Total economic output, known as gross domestic product, expanded at a solid 2.3% annual pace in the first quarter, the Commerce Department said Friday.

The figure was higher than analysts had expected and nearly double the 1.2% figure in the first quarter of 2017. Still, the growth in January though March this year is down from the 2.9% pace in the fourth quarter of last year.

Consumer spending dropped to its lowest level in nearly five years after an unusually strong end of 2017. It was up 1.1% in the first quarter compared with 4% in the fourth quarter of last year, which was the best in three years. A big reason for the decline was that consumers spent $19 billion less on motor vehicles.

A key measure of business investment also slowed after a strong fourth quarter, but remained robust.

“Putting it all together, the first-quarter GDP report was good but not great,” said Gus Faucher, chief economist at PNC Financial Services, who expects growth to hit 2.8% this year and 2.9% in 2019.

“Consumer spending will bounce back as job gains, wage gains and tax cuts support purchases,” he said. “Business investment will get a boost from good corporate profits, the corporate income tax cuts and a tight labor market that will encourage business spending to make workers more productive.”

There was good news in a separate report on incomes Friday: The tight labor market is helping push up worker compensation, new data showed.

The Labor Department said the employment cost index — a measure of wages, salaries and employer costs for benefits for private-sector workers — increased 1% in the first quarter. That was the biggest jump in more than a decade.

Friday’s economic growth data are the first 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.

“The full fiscal effect is not yet evident in the data, but we still expect growth of close to 3% by the end of this year,” said Chris Rupkey, chief financial economist at MUFG Union Bank in New York.

Trump has said his policies, particularly the tax cuts, would raise sustained annual economic growth to 3% or higher from the sluggish 2% 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 — slow first quarters that helped keep annual economic growth below 3%.

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 to 2016, 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%,” 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%, 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. The U.S. unemployment rate was 4.1% in March, the lowest since 2000.

But after topping 3% in the second and third quarters of 2016, economic growth slipped to 2.9% 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 noticed 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% growth for all of 2018. Economic growth was 2.3% for 2017, up from 1.5% 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%. He presided over growth of 2.9% 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% growth this year, increasing to 3.2% next year. Growth would be at least 3% a year through 2024. But those forecasts are higher than others. The Congressional Budget Office recently estimated 3.3% growth this year, dropping to 2.4% in 2019 and 1.8% the following year.

Federal Reserve policymakers expect 2.7% growth this year, declining after that. The International Monetary Fund had a similar forecast.

UPDATES:

9:20 a.m.: This article was updated with additional details and with comments from Gus Faucher of PNC Financial Services and Chris Rupkey of MUFG Union Bank.

5:55 a.m.: This article was updated with staff reporting.

This article was originally published at 5:35 a.m.