U.S. Economy Performing Like New England Patriots

U.S. Economy Performing Like New England Patriots

The U.S. economy, like The New England Patriots last year, did not perform at its best during the first quarter.

Gross Domestic Product (GDP) grew at a 2.3% annual rate, after averaging growth of just over 3.0% for the previous three quarters.

Slow first quarter growth, though, has been with us for the past three years. In 2017, the economy grew just 1.2% in the first quarter and in 2016, it grew just 0.6%. In contrast, the economy started 2015 with first-quarter growth above 3%, before gradually diving below 1% in the fourth quarter.

While low first quarter growth may be the result of a holiday-spending hangover, the impact of cold, snowy weather and other factors, naysayers are already suggesting that the quarter-to-quarter drop this year shows that tax reform is not working.

When tax reform passed at the end of 2017, some companies almost immediately announced plans to repatriate foreign earnings (boosting tax revenues), raise wages, hand out bonuses or add new jobs.

But it’s likely to take some time for lower corporate taxes to have a significant impact on business investment. Businesses plan a year or more in advance. Even when businesses decide to invest in technology, machinery or other capital expenditures, it will take additional time before they decide what to buy, take delivery, and implement new software or set up new machinery.

So it shouldn’t be surprising that, as The New York Times reported, “Data on the gross domestic product … showed that business investment grew at a 6.1 percent annual clip during the first three months of 2018, down from 7.2 percent during the first quarter last year. Excluding oil and gas investment, which is particularly volatile, the investment pace grew slightly over the past year.”

Of course, some companies are better prepared to make business investments than others. Many of the largest companies in the S&P 500, which have significant resources and know they will be judged by Wall Street on a quarterly basis, have already boosted their spending.

The Times noted that, “business spending by the larger corporations included in the Standard & Poor’s 500-stock index — as measured by their announcements of capital expenditures so far this earnings season — is up 23.5% from the first quarter of 2017, according to S&P Global Market Intelligence. That would be the fastest pace since 2012.”

Consumer Spending Lag

GDP growth was also affected by slower consumer spending. During the first quarter, consumers are paying taxes, not receiving tax rebates.

“Economists expect growth will accelerate in the second quarter as households start to feel the impact of the Trump administration’s $1.5 trillion income tax package on their paychecks,” according to CNBC.

And, while the unemployment rate has dropped below 4%, wages have thus far not recovered from the financial crisis. Once business investment kicks in, productivity should increase. If it does, businesses will be operating more efficiently and will be better able to afford to pay higher wages. Low unemployment, likewise, will force them to pay more to compete for qualified talent.

Like the New England Patriots last year, we believe the economy will perform with greater strength in the second, third and fourth quarters than it did in the first quarter.

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