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Trump tax cuts under scrutiny as solid US GDP report raises red flags



Donald Trump
Donald Trump

Sean Rayford/Getty

  • The US economy expanded faster than expected in the third
    quarter, thanks to strong consumer spending. 
  • Business investment, however, showed signs of stalling even
    after the biggest corporate-tax overhaul in 30 years. 
  • Some economists see this as an early sign that company
    spending does not match the enthusiasm of executives that some
    surveys have shown.

US economy
is still in high gear, thanks to consumers who
still have the means empty their wallets.

On Friday, the Commerce Department’s advance reading on
third-quarter gross
domestic product
showed the US economy grew by 3.5%, marking
the fastest back-to-back periods of growth since 2014. 

While consumer spending soared, the timing of slowdowns in
business spending and net exports last quarter raised concern
with some economists about the durability of the economy’s growth

Business investment in fixed structures like factories shrank by
0.04 percentage points in the third quarter, according to the
early GDP reading. Although a small decline, it was the first
since the fourth quarter of 2015, and occurred after the most
significant corporate-tax overhaul in three decades.

“While it is still too early to come to conclusions on the
relative effectiveness of the 2017 Tax
Cuts and Jobs Act
, there has to be some concern over this
development,” said Joe Brusuelas, the chief economist at

“The tax plan was essentially an enormous bet that a large,
unpaid for business tax cut would result in a significant
increase in productivity-enhancing investment which would the
boost the long-term US growth path. This data implies that, at
least for now, such a boost is not in the cards.”

The drop in business investment was surprising to Ben
Ayers, a senior economist at Nationwide, because surveys from
business owners have been strong. In other words, there’s

a gap

how executives say they feel
about business conditions and what they’re actually doing with
their money.

Additionally, a big reversal in business inventories added to
growth in Q3, but the current quarter does not look promising on
this front.

Inventories are a volatile category of GDP and may have surged in
the July-September period as companies stockpiled, bracing for
the impact of US tariffs on Chinese goods. Companies may have
also stockpiled on goods to meet strong consumer demand.

“Regardless of the reason, it represents a sizable asterisk
for an otherwise strong quarterly growth result and creates a
probable headwind to growth in the coming quarters as those
inventories are trimmed back,” said Jim Baird, the chief
investment officer for Plante Moran Financial

Apart from business spending, the details on trade provided
another reason to raise eyebrows at Friday’s GDP report. 

Net exports shrank by $98.1 billion, and trade provided the
biggest drag on the US economy in 33 years, according to
Bloomberg. This was a reversal from the second-quarter gain,
which President Donald Trump described as the “biggest and best
results” from the previous GDP report.   

 swings in inventories and trade in
Q4 will be smaller than in Q1, but the net effect of the two
components likely will be modestly negative, reversing the small
net gain in Q3,” said Ian Shepherdson, the chief economist at
Pantheon Macroeconomics, in a note. 

“At the same time, consumption probably can’t sustain 4%
growth, so overall we’re looking for slower GDP growth, though 3%
still should be achievable.”

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