The U.S. economy grew at its fastest pace in more than two years in the third quarter, powered by robust business spending, and is poised for what could be a modest lift next year from sweeping tax cuts passed by Congress this week.
While other data on Thursday showed a jump in the number of Americans filing for unemployment benefits last week, the underlying trend in jobless claims remained consistent with a tightening labor market.
The strong economy and tight jobs market has led many analysts to question the need for the $1.5 trillion tax cut package.
“We’ve never seen a Congress in history serve up tax cuts on a platter to businesses and individuals unless the economy was in recession,” said Chris Rupkey, chief economist at MUFG in New York. “Better buckle up ... it could be a wild ride in 2018.”
Economists are forecasting a modest economic boost from the tax changes, which include slashing the corporate income tax rate to 21 percent from 35 percent. Many of them believe the lower tax regime will lead to share buybacks and debt repayment rather than a boost in business investment.
With income tax cuts for individuals skewed toward higher-income households, economists also forecast only a marginal lift to consumer spending.
“The contribution of the tax cuts to aggregate economic growth will be modest, in the range of one-tenth to two-tenths of a percent,” said Anne Van Praagh, managing director of global credit strategy and research at Moody’s Investors Service in New York.
“We do not believe that the corporate tax cuts will meaningfully increase business investment spending.”
The fiscal stimulus is expected to come when the economy is at full employment, which raises the risk of it overheating.
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