The Washington PostDemocracy Dies in Darkness

The Trump tax cuts were supposed to set off an investment boom. They haven’t so far.

Source: U.S. Bureau of Economic Analysis (None/BEA)

The details might have changed, but the story remains the same: The economy is growing well, but not for the reason President Trump was hoping for.

Which is to say that there’s still no sign that his tax cuts are spurring the kind of investment boom they were supposed to. Indeed, according to the latest GDP numbers, nonresidential fixed investment was only up 0.8 percent in the third quarter of this year, adding a measly 0.12 percentage points to the economy’s better-than-expected 3.5 percentage points of growth. Part of this, as former Obama adviser Jason Furman points out, is probably because the most recent surge in oil investment is starting to fade — that seems to be why business spending on structures just fell — but even if you strip that out, there’s been very little increase in investment overall.

What seems to be happening instead is that the Trump tax cuts are just providing a boost to consumers. That, at least, is where the strength of the recovery continues to lie. Consumer spending was up another 4 percent in the third quarter and contributed nearly 2.7 percentage points to growth.

If you put all this together, then, you get a picture of an economy that’s growing at around 3 percent right now because of all the short-term stimulus it’s getting, but will soon go back to the 2 to 2.5 percent it was at before because that stimulus isn’t changing companies' long-term behavior like the Trump administration thought it would. They were convinced that cutting the corporate income tax would make investing here so attractive that money would come pouring in from overseas. That would then fund the investments we needed to increase growth today, and the fruits of it — higher productivity — would increase growth tomorrow as well.

Except, well, it’s not. The problem is that while the tax-cutting story the Trump administration was telling might be true for a small, open economy like, say, Bermuda’s, it was never going to be for a large and slightly closed one like our own. So it shouldn’t be a surprise that we’re seeing perhaps a modest increase in investment, but not the bonanza we were promised.

Now, that isn’t to say that our economic prospects are in any way gloomy. They’re not. Even if we can’t expect the economy to keep growing at the same 3 percent pace it has for the past year, we can expect it at least to do pretty well — and maybe even better than that in 2019. That’s because there will still be plenty of stimulus left in the system at that point, and the economy should have plenty of momentum then, too. The best way to tell that is to look at something that’s known as final sales to private domestic purchasers. It takes out all the most volatile parts of GDP — exports, inventories and government spending — to give us a better idea of the economy’s underlying strength. This increased 3.1 percent in the third quarter, and, as you can see above, is up 3.4 percent in the past year.

The big picture, though, is how little Trump has done to change our long-term economic outlook. His tax cut certainly seems to have juiced growth this past year, but since it wasn’t paid for, it has also made the Federal Reserve raise rates enough that its net effect should be pretty close to zero by the end of the next year or so. Unless, of course, companies do start investing far, far more than they are right now.

It’s the worst “Waiting for Godot” reboot ever.