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Lessons from the Trump Tax Cut

(This piece was first posted on my Patreon page.) The Trumpers were celebrating over the 3.2 percent GDP reported for the first quarter last week. They claimed it proved the success of their tax cuts.

But fans of arithmetic saw things differently. First of all, the jump in GDP was largely a fluke, with a big jump in inventory accumulations and a fall in imports accounting for almost half of the growth. Pulling these out, GDP growth was under 2.0 percent.

This isn’t just cherry picking. It is virtually certain that inventories accumulation will slow next quarter, this usually happens after a month of rapid accumulation. The logic is straightforward, if companies added a lot to their inventory in the first quarter, then they probably want to add less in the second quarter.

It’s a similar story with imports. Our imports typically rise quarter to quarter, unless the economy is in a recession. The shrinkage in the first quarter is likely a fluke, which means unless imports are revised up in subsequent reports (the GDP data will be revised twice before the second quarter data are released), we are likely to see a larger than usual jump in imports in the second quarter.

In that story, both inventories and imports are likely to be a drag on growth. This means that if we have an underlying growth rate of 2.0 percent, a slower rate of inventory accumulation, coupled with more rapid growth in imports, could mean that second quarter GDP will be close to 1.0 percent.

CEPR / May 03, 2019