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Economic growth appears to have slowed in Q4 2017. Or did it?

Written By | Jan 28, 2018
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Steel mill worker. Public domain image via Pixabay.com.

WASHINGTON, January 28, 2018: According to the U.S. Bureau of Economic Analysis (BEA), the first estimate of GDP growth in the Q4 of 2107 (there are two more estimates to be made in the next two months), America’s economic growth appears to have slowed somewhat, surprising some experts.

While the consensus forecast had predicted growth close to the actual 2.6 percent growth rate that was tallied, some forecasters had pegged U.S. growth at a much higher figure.  The New York Federal Reserve, for example, was forecasting 3.9 percent.

Since early 2017, when time the impact of President Trump’s policies on the economy was starting to be felt, America’s economic growth has come in at about 3 percent. Trump’s economists say that growth will remain above 3 percent into the near future and could trend much higher. Some more optimistic economists believe that growth could accelerate to 4 percent or better once the full impact of the GOP tax cut is felt.

Why was Q4 U.S. economic growth below 3 percent?

To the optimistic forecasters, the high level of consumption in October and November should have resulted in factories producing more in December in order to keep up inventory levels. But according to the initial GDP estimate inventories fell significantly, so production was not as great as thought. December’s surprising snowfalls and unufual arctic temperatures affecting wide areas of the country may also have had a negative impact on the production of goods and services.




The other factor affecting growth numbers was the impact of imports, which were higher than forecast. When consumers buy goods produced in another country but sold in the U.S., the effect on GDP is negative, as the GDP measures the value of all goods and services produced in the U.S.


Read also: Paul Krugman, Nobel Prize-winning economist, can’t understand business


An additional problem with high imports is that there is no multiplier effect on consumer spending. In other words, if consumers buy goods produced in the U.S., their money stays in the US and is eventually used to pay U.S. workers, buy U.S. materials and generate U.S. profits.  That means even more U.S. consumption. Hence, the multiplier effect.

Consumers purchasing foreign-made goods is both good and bad from an economic standpoint. On the good side, foreign-made goods are generally produced and sold here at a much lower price than the consumer would otherwise have to pay for domestically produced goods. This allows consumers to purchase more goods and services over all with their available income. That leads to an improved standard of living.

On the negative side, purchasing foreign goods means that American factories are not needed to produce them. That results in unemployment and closed factories, something that has long devastated many American towns and cities that depend on domestic factories in those jurisdictions for local employment. Hence, the loss of the multiplier effect.

President Trump is trying to walk a fine line with his trade policy. He wants to keep prices low, providing those low-price results in fair competition with foreign producers. But he also wants to bring some of the manufacturing capacity America has lost back to the U.S., enabling consumers to purchase American made goods.

While most economists agree that tariffs are not the answer to blunting the job-destroying effects of low-cost and at times subsidized foreign imports, Trump may believe that he has strengthened his bargaining position in future international trade discussions by showing his willingness to use tariffs to level the playing field.

What about economic growth in 2018?

The consensus view is that economic growth in 2018 will be at about the 3 percent level. Some economists think that number could turn out much higher. If business inventory levels were low at year end 2017, as the initial GDP estimate indicates, then at the beginning of 2018, production will have to increase to replenish those inventories.

Extreme weather may have a negative impact on production, as December’s frigid temperatures carried into the first part of  January. But losses attributed to the weather should be made up before the end of the first quarter. Some economists believe growth will actually accelerate in the first quarter, taken as a whole.

What about the new corporate tax rate cut?

The reduction in the corporate tax rate due to the GOP tax reform legislation will be the single biggest contributor to economic growth in 2018 and beyond. The new rate is already having positive impacts on the economy. Because corporations will now paying millions less in taxes, they are increasing workers’ pay, modernizing equipment, investing in corporate expansions, increasing dividends to stockholders (who reinvest back into the economy) and repurchasing some outstanding shares of their stock.



These share repurchases of shares mean that the sellers of the stock at higher prices will now have additional funds to invest back into the economy where they will determine the need and where opportunities are great.

In addition, the lower corporate tax rate, along with the resulting increase in Net Profits, means that some projects that may not have been profitable at the 35 percent tax rate, now look very good and are likely to get the go-ahead signal. That important change encourages business to expand.

There are many large American companies that have earned income that resides outside of America due to the negative impact of higher taxes here than in most countries abroad. The new law makes it far less expensive to bring the funds back, and many of these countries have already begun to do just that.

In a related phenomenon, we may also find that companies currently domiciled in countries that have tax rates higher than the new 21 percent U.S. rate, will want to relocate additional production capabilities here, further expanding our own economy.

The current fourth quarter 2017 GDP estimate will likely be revised upward at the end of February once all variables are factored in. That revision could see expansion rate increase to the 3 – 3 ½ percent range optimists were predicting, meaning growth did not slow in the fourth quarter after all.

Bottom line: 2018 will be a very good year for the American economy.

 

Michael Busler

Michael Busler, Ph.D. is a public policy analyst and a Professor of Finance at Stockton University where he teaches undergraduate and graduate courses in Finance and Economics. He has written Op-ed columns in major newspapers for more than 35 years.