What happened to the tax cut bump to economic growth? After expanding by a brisk 2.9 percent in the fourth quarter of last year and the 3.3 percent rate in the third quarter, the economy decelerated a bit in the first quarter to an annualized pace of 2.3 percent, consistent with good, not great growth.
That makes sense because despite politicians’ promises that the Republican tax cuts would spur more growth, economists warned that while most Americans would see a drop in their tax bills, the amount would be relatively small on a paycheck-by-paycheck basis. That fact might explain why after paying more at the gas pumps and everywhere else (headline prices were up 2.7 percent from a year ago and by 1.8 percent, less food and energy), consumers spent at the slowest pace in nearly five years in Q1
The rest of the year could see better spending patterns, according to the analysts at Capital Economics, who predict that “Those tax savings will start to add up over the coming months and, with the labor market continuing to strengthen and consumer confidence buoyant, there is still a good chance that they will help drive stronger growth in consumer spending over the rest of this year.” As a result, they predict that growth will rebound to 2.8 percent for 2018 as a whole.
Even if things are slowing down a bit to start the year, the expansion is alive and well. In fact, we are about to celebrate a milestone. May 2018 will mark the 107th month of the current growth cycle, which makes it the second longest in history, passing the 1960's Boom (1961-1969) that lasted 106 months. The technology miracle of 1991-2001 that totaled 120 months remains the longest on record.
Just because the current expansion (and bull market in stocks) have both been going on for nine years and counting does not mean that everything will come crashing down imminently. In fact, data suggest that the U.S. economy is doing just fine and unless there is a big outside shock, economists believe 2018 should see slightly higher growth rates than in 2017. Still, with a break in the action, the Fed is unlikely to take further action on short-term interest rates when they convene for their two-day policy meeting this week.
Although most of the action over the past couple of years has occurred in the short-term government markets, last week the 10-year Treasury note grabbed the headlines, after its yield touched 3 percent for the first time in more than four years. For consumers borrowing for mortgages or companies and municipalities seeking financing, that translates into higher costs. And while higher interest rates have been the cause of many turning points for markets and the economy, Federal Reserve officials have estimated that higher 10-year yields are unlikely to have much of an economic impact until it reaches around 3.5 percent.