Breakingviews - U.S. economy doing just fine without tax cuts

An iron worker leans on a safety fence to look at the New York skyline after watching a crane lift the final piece of the spire to the top of the One World Trade Center in New York May 10, 2013. REUTERS/Lucas Jackson

WASHINGTON (Reuters Breakingviews) - It turns out that the U.S. economy is doing just fine without tax cuts. Initial estimates show GDP expanded at an annualized rate of 3 percent in the third quarter, despite the effect of hurricanes Harvey and Irma. An increase in goods made but not sold helped, but so did global growth and healthy corporate earnings. Protectionist policies could put the trend at risk.

Third-quarter growth was a pleasant surprise after economists projected expansion of 2.5 percent. Growth in consumer spending, which makes up two-thirds of economic output, slowed down to 2.4 percent but is expected to rebound as the effects of the hurricane fade. And rising inventories contributed just over 0.7 percentage points to growth, in what could be a sign that companies think consumer demand will warm up.

There are other positive signs. Business investment, which had been lagging but improved in recent months, came in at a healthy 3.9 percent. Exports increased by 2.3 percent in their third quarter, which added more than 0.4 percentage points to economic growth. It’s aided by global expansion, with world economic growth in sync for the first time in years and Europe catching up with the United States. The International Monetary Fund projected the global economy would get a 3.6 percent boost in 2017 and grow by 3.7 percent the following year.

President Donald Trump has promised to cut the corporate income tax rate to 20 percent – but whether or not he succeeds, companies are performing well. The Nasdaq reached a record high on Friday morning after tech groups from Amazon AMZN.O to Microsoft MSFT.O reported robust third quarter earnings. On top of that, the United States is nearly at full employment with a jobless rate of 4.2 percent.

Past form suggests Trump will take credit. True, the nearly 20 percent rise in the S&P 500 since his election is partly due to the hope of tax cuts. But most of the positive economic trends are occurring without major legislative accomplishments. The biggest risk to this outlook is harmful trade policies, including a disintegration of the North American Free Trade Agreement, for which negotiations aren’t going well. The best that can be said is that Trump has not yet done the economy harm.

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- The U.S. economy grew at an annualized rate of 3 percent in the third quarter of 2017, the Bureau of Economic Analysis said in its initial estimate on Oct. 27. Economists surveyed by Reuters projected a growth rate of 2.5 percent.

- Consumer spending, which makes up about two-thirds of U.S. economic activity, rose by 2.4 percent in the third quarter. Exports increased by 2.3 percent, while rising inventories contributed just over 0.7 percentage points to GDP growth in the third quarter.


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