By Caroline Baum, MarketWatch
First-quarter economic growth exceeded even the most optimistic expectations, expanding at a 3.2% annualized rate . The Trump administration was quick to take credit for the continued strength in the U.S. economy.
At a rally in Green Bay, Wis., Saturday night, President Donald Trump again declared that his leadership and policies were delivering what he refers to as the best economy in history.
Kevin Hassett, chairman of the White House Council of Economic Advisers, got more specific.
The gross domestic product report “confirms our view that the momentum from last year was not a sugar high but a serious response to long-run policies that have made the U.S. a more attractive place for business,” Hassett told the Wall Street Journal on Friday.
There’s just one problem with Hassett’s assessment.
The unexpected strength in the GDP report came from inventories, trade, and state and local government spending, not from business investment, which is where one would expect to see the response to the kind of long-run, supply-side policies Hassett implied.
Private final demand, which is known in the GDP report as final sales to private domestic purchasers and which should be the beneficiary of tax cuts and deregulation, rose an anemic 1.3%, the smallest increase in six years.
At the same time, net exports (exports minus imports) and inventories accounted for a combined 1.68 percentage points — more than half — of the first quarter’s GDP 3.2% growth and the largest contribution in six years.
Where’s the beef?
So where’s the tax-cut-driven boost in capital expenditures?
Real nonresidential fixed investment — business spending on structures, equipment and intellectual property — rose at a 2.7% rate in the first quarter, half the fourth-quarter pace.
Yes, there were two back-to-back quarters of solid capex growth in 2018 following the enactment of the Tax Cuts and Jobs Act. Business fixed investment rose 11.7% in the first quarter of 2018 and 8.7% in the second before slumping to 2.5% in the third.
However, investment posted solid, back-to-back quarters in the middle of 2014 as well, with real GDP averaging 5%.
What’s more, investment in structures posted a third consecutive quarterly decline in the first quarter, while spending on equipment rose a paltry 0.2%. A key barometer of future capital spending, new orders for nondefense capital goods excluding aircraft, has seen a deceleration in year-over-year growth since its recent peak in September 2017.