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IMA Tax Policy Blog

Tax Reform Win: Capital Investments Increased 9.2% In First Quarter of 2018

by Chad Moutray, NAM

Key Takeaways:

  • U.S. GDP grew 2.2% in the first quarter and is on track to grow roughly 3% in 2018.
  • Nonresidential fixed investment increased 9.2%, likely boosted by tax reform and a strengthened economy.

The Bureau of Economic Analysis reported that the U.S. economy grew by an annualized 2.2 percent in the first quarter of 2018, off marginally from the prior estimate of 2.3 percent growth. Nonresidential spending was the bright spot in this revision, increasing more than previously thought, but that was offset by softness in many of the other variables. Overall, real GDP growth continued to expand at the fastest pace in three years, even as it represented some easing from the 2.9 percent growth rate in the fourth quarter of 2017.

Since the end of the Great Recession, the U.S. economy has expanded 2.2 percent on average, with 2.3 percent growth in 2017. Moving forward, real GDP should grow by roughly 3 percent in 2018, which would be the strongest growth rate since 2005. Passage of tax reform and other pro-growth measures should help to stimulate economic activity, allowing us to reach that goal.

As noted above, nonresidential fixed investment stood out in this revision, up 9.2 percent at the annual rate in the first quarter and likely boosted by tax reform and the strengthened global economy. This was up from a previous estimate of 6.1 percent growth, and it registered the best quarterly growth rate since the third quarter of 2014. Businesses spent more on structures (up an annualized 14.2 percent) and intellectual property products (up 10.9 percent), both of which registered the best reading in at least a year, with solid growth for equipment spending (up 5.5 percent). Nonresidential fixed investment contributed 1.13 percentage points to top-line growth, up from 0.76 percentage points in the earlier estimate.

On the other hand, residential investment and inventory spending were both slower than originally thought in this revision. Residential spending fell 2.0 percent in the first quarter at the annual rate, beginning the new year on a soft note, and subtracted 0.08 percentage points from headline real GDP growth. At the same time, increased spending on inventories had been estimated to add 0.43 percentage points to U.S. economic growth in the prior release, but in the latest data, inventories contributed just 0.13 percentage points. It is hoped this would suggest increased inventory spending in the second-quarter figures.

On the international front, net exports swung back to be a slight positive contributor in the first quarter, adding 0.08 percentage points, after subtracting 1.16 percentage points from GDP in the fourth quarter. Goods exports increased 5.4 percent in the first quarter, which was more than enough to offset the 2.2 percent rise in goods imports.

In contrast to those measures, consumer spending on goods was a weak spot and something that it is hoped will turn around in both revisions and upcoming quarters. Goods spending declined 0.6 percent at the annual rate in the first quarter, pulling back from the 7.8 percent gain in the fourth quarter (the strongest quarterly gain in nearly 12 years). Indeed, this mirrors other data, which have found Americans more skittish about spending in the early months of 2018 in the aftermath of more robust purchasing at year’s end. Indeed, durable goods spending fell an annualized 2.6 percent in the first quarter, with nondurable goods demand up just 0.4 percent. As a result, goods spending subtracted 0.13 percentage points from real GDP growth for the quarter.

Service-sector spending, on the other hand, rose modestly, up 1.8 percent, adding 0.84 percentage points to top-line growth. This was off somewhat from the previous estimate of 0.97 percentage points, but still encouraging.


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