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- President Donald Trump has long promised to bring the US back to a 3% annual gross-domestic-product growth rate.
- GDP growth for 2018 was 2.9%, according to Thursday’s release from the Bureau of Economic Analysis.
- The slight miss came during the first full year since the Republican tax bill became law.
- Most economists do not expect Trump to meet his goal in 2019, either.
President Donald Trump came just shy of the biggest economic promise of his presidency in 2018, according to data released Thursday, in the first full year since Republicans passed sweeping tax cuts.
The Bureau of Economic Analysis on Thursday released gross-domestic-product growth for both the fourth quarter and all of 2018, which showed that the US economy grew at a 2.9% rate last year (2.88%, to be exact).
While that annual growth rate was the strongest since 2015, it still came in just shy of Trump’s long-promised 3% annual GDP growth. Many White House advisers were publicly confident that the US would make it to 3%, but a fade into the end of the fourth quarter seemed to tail off growth just enough to move the number below that threshold.
There were two key areas where the GOP and Trump said the tax law enacted at the end of 2017 would boost economic growth. The first was spending by consumers who were getting higher take-home pay, and the second was by increased investment from businesses that saw their tax bill fall.
According to the US government data, both of those categories improved in 2018 – but not by significant margins.
On the personal-consumption side, consumer spending added 1.81 percentage points to overall GDP and grew 2.6% compared with 2017. This was an increase from the 1.73-point contribution and 2.5% growth rate in 2017 but down from the 1.85 points it added and the 2.7% growth rate in 2016. So while overall consumption growth remained strong, it did not noticeably break out from the postrecession average.
Looking at business investment, nonresidential fixed investment – a proxy for how much companies are spending on capital investments like new equipment and research – did grow at a strong pace in 2018, adding 0.92 points to annual GDP and growing at a 7% pace. Both the contribution to GDP and the rate of growth were stronger than in 2017 and 2016.
But the growth in business investment faded in the second half of the year, with nonresidential fixed investment growing by 11.5% and 8.7% in the first and second quarters but only 2.5% and 6.2% in the third and fourth quarters.
The slowdown was most likely a major reason that Trump was unable to capture the elusive 3% annual mark.
‘Nothing more than a sugar high’
While it is just one year and it’s unclear what effect these investments will have over time, the slowing trend over just one year has led many economists to suggest that post-tax-cut business investment may have peaked.
Ian Shepherdson, the chief economist at Pantheon Macroeconomics, wrote in a note to clients that the trend over the year showed that business investment was most likely “softening” and that 2018 might have been the high-water mark for the tax-cut boost.
“The bigger picture for this year is that growth is reverting to the post-crash trend, 2-to-2.5%, demonstrating that the personal tax cuts offered nothing more than a sugar high, and that the business tax cuts did nothing to lift trend growth,” Shepherdson said.
Similarly, economists across Wall Street have projected that business investment will return to its long-run pace in 2019. According to Bloomberg data, GDP on average is expected to grow at a 2.5% rate in 2019.
While business investment and personal consumption didn’t explode as Republicans probably hoped, Trump did get a big boost from the government.
Government spending contributed 0.26 points to GDP in 2018, a significant boost from the 0.01-point drag in 2017. This was largely due to the massive bipartisan budget deal reached by Congress early in the year.
Stripping government spending out of the equation, Trump would have delivered 2.6% GDP growth – well below the promised amount.
This isn’t to say that 2018 GDP was a huge disappointment. Year-over-year GDP growth in the fourth quarter did come in at 3.1%, the annual number is still at the higher end of most people’s previous long-term forecasts, and many economists scoffed at the idea that GDP would approach 3%. But there didn’t seem to be the economic “rocket fuel” that Trump once promised.
It is also important to note that the numbers will get revised once more on March 28, so there could be some wiggle room for Trump to get the growth that was promised. But based on Thursday’s numbers, Trump came up a tad short.