On Friday, the Bureau of Economic Analysis (BEA) released its first quarter estimates of major components of GDP. This is the first full quarter of data released since the adoption of the Tax Cuts and Jobs Act. However, these estimates are still what the BEA calls “advanced” estimates (the BEA will release its full estimates later next month) and a quarter of the data is probably not enough to draw solid conclusions about the impact of ‘a given policy.
According to the BEA, first quarter real GDP grew by 2.3% (annualized rate), which was slightly slower than real GDP growth in the fourth quarter of 2017 (2.9%). However, the GDP in the first quarter of 2018 grew by 2.9% compared to the first quarter of 2017 last year. It is an acceleration of the American economy. The fourth quarter of 2017 increased by 2.6 compared to the fourth quarter of 2016, while the first quarter of 2017 increased by 2% compared to the first quarter of 2016.
Can we say something about the Tax Cuts and Jobs Act (TCJA) with this data? One place where TCJA is likely to appear is fixed investment, especially in equipment and structures. The TCJA reduced the corporate tax rate and accelerated the cost recovery of these assets. According to the BEA, fixed investment in equipment grew 4.7% (annualized) in the first quarter, which is slower than the previous period, which saw annualized growth of 11.6%. Non-residential structures grew at an annualized rate of 12.3% in the first quarter, almost twice as fast as the previous period (6.3% in the fourth quarter of 2017).
However, as Greg Ip from The Wall Street Journal mentioned, we don’t know how far this is right now. Companies may have postponed many planned investments in the fourth quarter of 2017 from the first quarter of 2018, which would have the effect of reducing investment growth in the first quarter of 2018.
It should also be mentioned that investment in non-residential structures increased very slightly in the last quarter (around 0.1% of GDP) and investment in equipment remained stable as a percentage of GDP.
Although data for this first full quarter since the adoption of the TCJA shows some positive trends in GDP, it does show a slight reduction in investment growth, perhaps due to the timing. As we get more data over time, we will be able to make more solid observations about the economy after the tax law is passed. But we must always be careful not to draw too strong conclusions because we can never observe the counterfactual, or the economy in which the tax law was never passed.
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