October 25, 2018

Real (inflation-adjusted) gross domestic product (GDP) grew at an annualized rate of 3.5 percent in the third quarter of calendar year 2018, according to today’s announcement by the Bureau of Economic Analysis. That follows growth of 4.2 percent in the second quarter.

This is a strong level of economic growth, but it is likely temporary. Moreover, the economy is growing, but so is our deficit — which is an unusual and troubling trend.

Higher Growth in the Near Term Was Expected Due to Fiscal Stimulus

Recent growth rates largely have conformed to expectations, as many economists expected growth this year to be driven by the stimulus from the Tax Cuts and Jobs Act (TCJA) enacted in December 2017, as well as from the additional appropriations enacted in early 2018. For example, the Congressional Budget Office (CBO) reported in its Budget and Economic Outlook released in April that such measures would boost growth starting in mid-2018. The recent tax and spending legislation injected billions of dollars into the economy over the past year — giving the economy a jolt, but also driving up the deficit.

Rapid growth in the near term was expected as a result of tax and spending legislation enacted in 2017 and early 2018.

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Boost to Growth Will Be Temporary

The current rate of growth is likely temporary. Forecasters warn that by 2020, the GDP-boosting effects of the TCJA and increased appropriations will have faded, and growth will be tempered by greater levels of debt and higher interest rates. In fact, the International Monetary Fund (IMF) in its October data release reduced its forecast for GDP growth in the United States for 2019, citing changes in trade measures. It expects full-year GDP growth to be 2.9 percent in calendar year 2018, and to soften to 2.5 percent in 2019. Those projections are echoed by CBO, whose most recent economic report projects annual GDP to grow by 3.0 percent for 2018. In 2019, CBO projects GDP growth to slow to 2.8 percent. By 2023, CBO projects that GDP growth will drop to 1.6 percent, while the IMF projects growth of 1.4 percent.

Growth over the next few years is expected to slow as the recent fiscal stimulus wanes.

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Normally, rapid growth in GDP would lead to a reduction in the deficit as revenues increase and spending for programs such as unemployment compensation decreases. However, despite the current economic expansion and low unemployment, our fiscal outlook is worsening because the positive fiscal effects of economic growth have been more than offset by legislative changes that have widened the gap between revenues and spending. Both CBO and IMF expect that current levels of economic growth are temporary, as slow expansion of the labor force and levels of productivity similar to historical averages will limit GDP growth in the future. Now, while the economy is strong, lawmakers should take advantage of the opportunity to get our fiscal house in order so that our nation is on a more solid fiscal footing and better prepared for unexpected events and lower rates of growth in the future.


Related: The Two Reasons Long-Term Economic Growth Will Slow, and Why The Boost From Tax Cuts is Only Temporary


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