GDP Growth Nearing 4 Percent – Just What the New Tax Law Promised

Though the new tax law that was officially signed into law around Christmas 2017 divided Washington, D.C. – not to mention much of the country – along party lines, Republicans were confident they could “sell” it to their constituents for a variety of reasons. Arguably the biggest reason was the fact that many Americans would be getting taxed less, thereby receiving more take-home pay in their checks.

Now, however, they perhaps have an even better way to sell it – the tax cuts have helped drive the economy in ways not seen in years. Specifically, the gross domestic product, or GDP, is up about 4 percent in the second quarter of 2018 – and that’s a projection that President Donald Trump made before he signed the bill into law late last year. It’s a projection that has held true. And it looks like this growth isn’t close to slowing down in the near-term, though there are a few things to keep watch on.

Many supporters will claim they saw a result like this coming before the law was even passed. But, how exactly is Trump’s tax plan driving the economy?

Behind the Growth

As mentioned above, most American workers are getting taxed less, which means they’re receiving more money in their paychecks each month. They’re now taking this excess money, turning it around, and spending it — which is always good for a domestic market.

In the month of May, total retail sales were about about 0.8 percent, which helped fuel this 4 percent growth. If you take out sub-par auto sales, the retail sales increase would have been closer to 1 percent.

Now, there are a few factors that could lead to more retail growth, like nicer weather, but having more disposable income certainly plays a role in this as well. For comparison’s sake, there was growth during the first quarter of the year as well, but it was only at about 2 percent. The growth has about doubled from the first quarter to the second quarter as more Americans have come to realize the benefits of the tax cuts.

How High Can it Go?

When President Trump predicted that we’d see 4 percent growth back in 2017 before he signed the tax bill into law, he also expressed a “why stop there” type of optimism, claiming he believed it could go as high as 5 or even 6 percent.

While all politicians focus on the positive and dabble in hyperbole from time to time, there’s actually no reason to think that the growth couldn’t eventually reach these heights. Though consumer spending seems to come in waves, the growth about doubled from Q1 to Q2. Who’s to say the trend won’t continue throughout Q3 and Q4, especially as more and more consumers adjust their tax withholdings and become more aware of what they can expect in terms of a tax refund with their 2018 fiscal year taxes?

Another factor that needs to be considered is the corporate tax cut that was part of the new law. While many economists seem to view the household and consumer tax cuts as a temporary growth phenomenon, the corporate tax cut is a bit of the gift that keeps on giving.

Of course, there are things to be on the lookout for that may stall economic growth. A big one is the trade tariffs the U.S. has recently imposed on China, Canada and Mexico. Any type of tariff has the potential to ignite a trade war and stall economic growth. It’s worth noting that even with the imposed tariffs, consumer confidence is still very high and unemployment is at a historic low. The economy is doing well, and the new tax law is a big part of that.

If the GOP is still looking to “sell” its constituents on the benefits of it, it’s got a pretty good story to tell.

Regards,

Ethan Warrick
Editor
Wealth Authority

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