There is no economic boom in sight

There is no economic boom in sight
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To understand what is happening in the economy right now, the best advice is to listen intently to the Bureau of Economic Analysis (BEA) and the Bureau of Labor Statistics (BLS). The BEA recently issued its revised GDP report for the first quarter of 2018 and its report on personal income and outlays in April, while the BLS released the employment report for May. The first two reports point to the economy’s continuing weaknesses, and the failure so far of last year’s huge tax cuts to spur investment, while third shows employment continuing to grow at a healthy rate.

The headline number, 2.2 percent GDP growth in the first quarter of 2018, was not encouraging. Economic growth has slowed steadily for three consecutive quarters, and the most recent one was the slowest in a year. Digging further into the data, the report shows consumers pulling back. From January through March, consumer spending grew at barely a 1 percent rate, compared to the last three months of 2017. Residential investment, measured by home sales, did even worse in the first quarter this year, falling at a 2 percent annual rate.

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The positive news was an uptick in business investments, which grew at a healthy annual rate of 9.2 percent, following gains at 6.8 percent annual rate in the last three months of 2017. That is an important development for President TrumpDonald John TrumpAverage tax refunds down double-digits, IRS data shows White House warns Maduro as Venezuela orders partial closure of border with Colombia Trump administration directs 1,000 more troops to Mexican border MORE and the Republican Party because the first quarter this year were the first three months under the big corporate tax changes they enacted last year. To what extent do those gains show that the tax changes are working? That is the remaining question.

According to the data, not a great deal. In the first quarter of 2018, business fixed investments increased at an annual rate of $64.1 billion, including depreciation, compared to the fourth quarter of 2017. But that is not much more than the gains in the previous three quarters, when business investment grew at an average annual rate of $43.2 billion. So, the tax changes, at most, explain a $20.9 billion annual bump in business investment. That comes to less than $1.75 billion per month. Yet, no one should be surprised. As the expansion nears its ninth birthday, attractive investment opportunities have simply become hard to find.

The new income data also show that the 2017 corporate tax cuts, thus far, have done little for average Americans. In fact, over the first four months of this year, wage and salary growth slowed to 0.275 percent on a monthly basis, compared to 0.325 percent throughout 2017. Strikingly, the BEA data also show that corporate profits slowed in early 2018, for the third consecutive quarter. In the first three months of this year, the pre-tax profits of U.S. corporations came in at an annual rate of $2.2 trillion, which was $12.4 billion less than the last three months of 2017. But it is crystal clear the tax cuts are fulfilling their basic purpose, as federal tax on those profits declined at an annual rate of $84.5 billion, nearly seven times as much as those profits themselves.

The good news comes from employment. Jobs grew by more than 200,000 in May, generally in line with the employment gains of the last four years. For economists, strong job numbers along with weakening growth and wages are perfectly consistent for an economy near the tail end of an expansion. Employment has been a “lagging indicator” in every business cycle since the 1940s, which means that it grows faster than GDP or consumer spending in the final year or so of an expansion and more slowly in the early years of each cycle.

Unless there is a real investment boom, GDP and consumer spending eventually overtake employment, and job growth slows tool. If this mediocre expansion receives a nasty shock from a trade war, a crisis for the euro, or sharp increases in energy prices, which are all plausible developments today, it will be time to prepare for the coming recession.

Robert J. Shapiro was undersecretary for economic affairs at the U.S. Department of Commerce during the Clinton administration. He now serves as chairman of the economic advisory firm Sonecon.