Economic Indicators | Economic Growth

News from EPI Increased government spending boosts growth, rising trade deficit and weak investment muffles it

The Bureau of Economic Analysis (BEA) reported today that gross domestic product (GDP) — the widest measure of the nation’s economic activity—rose at a 3.5 percent annualized rate in the third quarter of 2018, slightly down from the 4.2 percent growth rate in the second quarter. Growth so far in 2018 has picked up relative to previous years. Today’s report provides some clear evidence about why this pick-up has occurred: fiscal policy swung from steeply contractionary to expansionary. The contribution to growth made by federal spending in the so far in 2018 has been stronger than any other comparable period since 2010—when spending from the Recovery Act was still at its peak. Those looking for policy lessons from the economy’s growth pick-up in 2018 should focus here—expansionary fiscal policy, particularly spending, works to boost the economy.

Besides an increase in spending, the other expansionary fiscal policy measure taking effect in 2018 was the tax cuts passed at the end of last year. While these cuts may have contributed a bit to the strong growth in consumption spending so far in 2018, they have largely failed to produce any obvious boost to business investment, which was the primary justification for the tax cuts’ passage made by the administration and congressional Republicans. Non-residential fixed investment grew at just a 0.8 percent annualized rate in the third quarter. So far in 2018, this investment has averaged 5.1 percent growth, down from growth in the first three quarters of 2017 (5.6 percent), a period before the tax cuts had passed.

Three final data points are worth mentioning. First, a full 2 percentage points was added to this quarter’s growth rate from accelerating inventory investment. This component of GDP is notoriously volatile. A common measure that strips it out (final sales) saw much less rapid growth (1.4 percent). Second, the trade deficit expanded rapidly and subtracted 1.8 percentage points from growth this quarter. If the Trump administration is trying to boost American competitiveness with its policy actions, it is clearly failing. Finally, the measure of “core” inflation tracked closely by the Fed (the price deflator for personal consumption expenditures excluding food and energy prices) rose 2.0 percent year-over-year. This is in line with the Fed’s long-run inflation target, but is not fast-enough growth to make up for much-slower rates of inflation in recent years.

See related work on GDP

See more work by Josh Bivens