Early this year, Congress approved a budget deal that will increase federal spending by hundreds of billions of dollars over the next two years. Many economists question the wisdom of passing what amounts to a debt-funded stimulus package when unemployment is low and the economy is strong. But whether or not they like the policy, they agree it will give the economy a temporary jolt.
Unlike the trade effects, the lift from government spending won’t disappear overnight. Most economists expect the budget deal to keep adding to growth for the rest of the year and into 2019. After that, though, the effects will fade.
As a result, some economists are focused on a measure of growth that strips out government spending, as well as trade and inventory effects. Research from President Barack Obama’s Council of Economic Advisers found that measure, known as “final sales to private domestic purchasers,” to be a better predictor of long-run growth trends.
What about the tax cuts?The Republican tax cuts, which took effect in January, didn’t have much effect on economic growth in the first quarter. Consumer spending growth actually slowed, and business investment in equipment, which the tax law was meant to encourage, had its weakest showing in a year.
The second quarter could be a different story. Retail sales and other data suggest that consumer spending rebounded, and capital spending has been picking up as well. The tax cuts probably contributed to both trends, although it will be hard to discern exactly how much.
Economists will be watching business investment particularly closely. The Trump administration and its supporters argue that the tax cuts will stimulate investment, which could make the American economy more productive in the long term. Critics argue that companies will mostly return their tax windfalls to shareholders in stock buybacks and dividends, giving the economy the equivalent of a short-term sugar high but doing little for the longer run.
“We have yet to see any meaningful evidence of an increase” in investment, said Joe Brusuelas, chief economist at the accounting firm RSM U.S. “That’s something that you can’t make a judgment on in one or two quarters. That’s something that you make a judgment on in two or three years.”
