Growth of GDP seen at 3 percent

Solid pace buoys tax-plan backers

WASHINGTON — The U.S. economy expanded at a 3 percent annualized rate between July and September, advancing President Donald Trump’s goal of faster economic growth and potentially providing a tail wind to Republican efforts to overhaul the tax code.

The robust pace of economic growth defied analysts’ expectations that activity might slow in the third quarter because of Hurricane Harvey. This marks the second quarter of above-trend growth for Trump, after the economy expanded at a annualized pace of 3.1 percent in the spring, the Bureau of Economic Analysis reported Friday.

Combined with a strong labor market and record highs in the stock market — the Standard & Poor’s 500 index is up 15 percent year to date — the economy is proving to be an ally of a president who is otherwise suffering from unusually low approval numbers and political conflicts. But opinions vary greatly over whether Trump should take credit for the uptick in growth.

“He gets zero credit because he hasn’t done anything. There’s been zero change in economic policy,” said Mark Zandi, chief economist at Moody’s Analytics, a research firm. “This uptick is happening across the globe. It’s not just the U.S.”

Conservatives, however, point out that Trump has dramatically scaled back regulations on businesses, which is helping to spur more corporate spending, they argue. Third-quarter

growth was bolstered by companies beefing up their inventories and spending more on equipment.

“It’s striking how much has been done on the regulatory front. It has to matter to the economy,” said economist Doug Holtz-Eakin, president of the right-leaning American Action Forum. His organization keeps a tally of how much government regulations cost.

Economists initially expected that hurricanes Harvey in Texas and Irma in Florida would deal a blow to the country’s steady growth but became more optimistic in recent weeks.

The destruction wrought by the storms was outweighed by the continued spending of consumers and businesses. The job market is lively, and the stock market has rallied to record highs. Chief executives and consumers are more confident than they have been in more than a decade, recent surveys show.

“There are no real head winds to growth for the first time since the expansion began,” said Mark Zandi, chief economist of Moody’s Analytics. “We are at full employment, and we are in full swing. Let the good times roll.”

Trump and his allies in Congress are making the case that passing a tax overhaul — which aims to cut income and corporate taxes by $1.5 trillion over a decade — is critical to continuing the economic expansion. House Republicans plan to unveil a bill on Wednesday on the tax code and both chambers plan to pass one by Thanksgiving, an extremely tight deadline for a major piece of legislation.

Yet the resiliency of the economy also underscores the high stakes of the effort and what any slowdown in growth, or decline in the stock market, might mean for the president and Republicans politically.

“A good portion of people voted for Trump because they were unhappy with their individual economic plight,” said Barbara Perry, director of presidential studies at the University of Virginia’s Miller Center. “They expect their lot in life to improve.”

Few economists expect the economy to continue to expand at a 3 percent pace in coming quarters, given the waves of baby boomers retiring and exiting the workforce. Under President Barack Obama, the economy grew an average of 2.1 percent a year, although he also had many quarters where growth exceeded 3 percent.

Trump repeatedly promised growth of over 4 percent on the campaign trail, something that hasn’t happened consistently since the late 1990s.

“An above-trend quarter does not mean that the trend has picked up,” said Jim O’Sullivan, chief U.S. economist at High Frequency Economics.

Trump’s Treasury Secretary Steve Mnuchin recently warned Congress that the stock market would see a “significant” drop if the tax package does not pass. The White House reiterated that message again Friday.

The United States is on track for a history-making expansion. If the current growth cycle lasts until May, as most economists predict, it will be the second-longest expansion in U.S. history, according to Lakshman Achuthan, co-founder of the Economic Cycle Research Institute. If it lasts until July 2019, it would surpass the 1991-2001 expansion as the longest.

“Some people may think we are in the seventh or eighth inning of this expansion, but in the business cycle game, there is no fundamental reason an economic expansion cannot last for 20 innings or longer,” Achuthan said.

There’s a heated debate among economists over how much Trump’s tax plan, which is being finalized now, will bump up growth. The Trump administration says tax cuts will cause a large uptick, so much so that the economy will grow more than 3 percent a year, which hasn’t happened since 2005.

“I expect the impact on GDP growth will be muted,” wrote Megan Greene, chief economist at Manulife Asset Management in a note Friday. She predicts most companies will spend their extra cash on buying back more stock and raising dividends, a boon to Wall Street that won’t do much for Main Street.

Goldman Sachs forecasts only a modest 0.1 to 0.2 percentage-point increase in economic growth if Congress passes the tax bill. The Wall Street bank also cautions that growth depends not just on what Congress and the White House do, but also the Federal Reserve. After years of stimulative low interest rates, the Fed is beginning to lift rates, which amounts to tapping the brakes on the economy.

“This tail wind is unlikely to persist as the Fed continues to tighten,” Goldman warned in its weekly kickstart newsletter this week.

Trump is about to select the next Fed chairman, the most powerful economic policy position in the United States. He is currently debating between reappointing current Chairman Janet Yellen, an advocate of low rates to help growth and jobs, or nominating someone like Stanford economist John Taylor, who favors raising interest rates faster.

The leading candidates for the job are Yellen, Taylor and Jerome Powell, who is currently a Fed governor and seen as someone likely to continue many of Yellen’s low-rate policies.

Few economists expect the economy to continue to expand at a 3 percent pace in coming quarters, given the waves of baby boomers retiring and exiting the workforce.