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Our newspapers are 100% sourced from sustainably certified mills.GOT A TIP FOR US? SUBMIT IT AT WSJ.COM/TIPSThe name of the Blaxsta es-
tate near Stockholm was mis-
spelled as Blaxta in a Page One
article Wednesday about wine-
making in Northern Europe.
The article also misspelled the
last name of Norwegian wine-
maker Anne Enggrav as Enn-
grav.PG&E Corp.’s Caribou-Pa-
lermo transmission line was
de-energized earlier this year,
and it doesn’t carry electricity.
A U.S. News article Wednesday
about PG&E’s equipment incor-
rectly said on first reference
that it carries electricity.The Congressional BudgetOffice said in August that an-
nual deficits as a share of eco-
nomic output are expected to
average 4.7% over the next de-
cade, higher than the 4.3% the
CBO estimated in May. An Aug.
22 U.S. News article about fed-
eral deficit projections incor-
rectly referred to economic
growth rather than output,
and it incorrectly said the
CBO’s May estimate was 4.4%.A label above the headline
of a World Watch article
Wednesday about an attack
that killed 18 people in Kar-
bala, Iraq, incorrectly indi-
cated that the article was
about Iran.Readerscan alert The Wall Street Journal to any errors in news articles by
emailing [email protected] or by calling 888-410-2667.CORRECTIONSAMPLIFICATIONS
slight,and swamped by
other forces. Business invest-
ment, for example, de-
clined at an annualized 3% in
the third quarter, likely be-
cause of lower oil prices,
trade war uncertainty, and
the grounding of Boeing
Co.’s 737 MAX airliner.
Nonetheless, the tax cut
has underdelivered. Macro-
economic Advisers, a private
forecasting firm, compared
what it thought in 2017 the
economy would do without a
tax cut to what actually hap-pened through the 2019 sec-
ond quarter. Business invest-
ment on buildings and other
structures significantly un-
derperformed the projec-
tions while investment in in-
tellectual property
outperformed. This was de-
spite the tax law treating
structures most favorably
and intellectual property
least. “The patterns of in-
vestment growth were in-
consistent with changes in
investment incentives” in the
tax law, Jane Gravelle, a taxThe corner-
stone of Presi-
dent Trump’s
domestic eco-
nomic agenda
is the tax cut
he signed into law in late- It would, he said, lift
U.S. sustained annual eco-
nomic growth to 3%, or even
as high as 6%. His advisers
said it would boost aver-
age household incomes by at
least $4,000 a year. His
Treasury secretary said it
would pay for itself.
N
earlytwo years later,
none of those things
have happened, and
there is scant sign they will.
The U.S. economy did enjoy
a burst of 3% annualized
growth after the tax cut first
took effect at the start of- But it has since
slipped. It grew at a 1.9% an-
nual rate in the third quar-
ter. In the past 12 months,
the economy grew 2%, about
the same as it averaged from
2011 through 2017.
This should not come as a
surprise. The administra-
tion’s claims rested on the
belief that cutting the corpo-
ratetaxrateto21%from
35% and allowing companies
to immediately write off the
cost of new equip-
ment would boost business
investment and thus worker
productivity and wages. Yet
numerous other advanced
countries had already cut
their corporate rates in the
prior two decades without
experiencing anywhere near
the growth boost the Trump
administration prom-
ised. Many experienced no
boost at all.
For the economy and mar-
kets, this doesn’t really mat-
ter since most economists
and investors had much
more modest expectations
than the administration. For
the political landscape and
future tax policy, though, it
might matter. Democrats
hope to make the economy,
inequality and the middle
class central to the 2020
election policy debate.
The failure of Mr. Trump’s
tax cut to deliver as promised
will embolden those who
want to raise taxes on corpo-
rations and investors to pay
for their ambitious programs
and combat inequality.
In theory, lower corporate
tax rates should help growth.
By raising the after-tax re-
turn on investment, it should
boost capital spending and
productivity and thus wages.
But most economists
thought the effect would beexpert at the nonpartisan
Congressional Research Ser-
vice, told Congress in July.
Joel Prakken of Macroeco-
nomic Advisers estimated
hourly compensation, ad-
justed for inflation, was up
just 3.3% through the third
quarter since the tax cut
took effect. But he estimates
itwouldhavetobeup7.8%
to be on track to meet the
$4,000 annual income boost
the Trump administration
predicted.W
hileinvestment did
accelerate in 2018, a
staff study by the
International Monetary Fund
attributed this to businesses
responding to higher sales as
personal tax cuts boosted
household consumption and
a budget deal raised federal
spending. These are transi-
tory “Keynesian,” or de-
mand-side effects, whereas
the administration pinned its
predictions on longer-lasting
supply-side effects through
increased incentives to in-
vest and work. Moreover,
the IMF study found invest-
ment actually rose a bit less
than the experience with
postwar tax cuts would have
predicted.
These ho-hum results
don’t mean the tax cut hadno supply-side benefit, only
that any benefit is undetect-
able amid other forces. They
need not undercut Mr.
Trump’s case that a strong
economy means he should be
re-elected, provided unem-
ployment stays low and re-
cession is avoided. But they
make it easier for Democrats
to claim Mr. Trump’s policies
have mostly benefited corpo-
rations and the rich rather
than ordinary workers. Mas-
sachusetts Sen. Elizabeth
Warren has made this case
most forcefully, promising to
hit big companies with a
new 7% corporate tax and
therichwitha2%to3%tax
on wealth over $50 million.
The political appeal of
taxing capital is growing. Be-
sides Ms. Warren, Vermont
Sen. Bernie Sanders has en-
dorsed a wealth tax and
polls find broad support for
it among the public—far
more than for Medicare for
All. Meanwhile Ms. Warren,
Mr. Sanders, California Sen.
Kamala Harris, South Bend,
Ind., Mayor Pete Buttigieg
and former Vice President
Joe Biden have all endorsed
repealing some or all of Mr.
Trump’s corporate rate cut.
If next year’s election turns
on taxes, it’s a fight Demo-
crats are eager for.Intellectual
propertyproductsStructuresEquipmentTheInvestment Conundrum
Investmentinstructuresisfallingdespitegeneroustreatment
inthe2017taxlaw.Firsttaxlawprovisions
takeeffectYear-over-year percentage changeSource: Bureau of Economic Analysis30015%’19’18’17’16’15’14’mainedstrong, while spending
on services slowed.
Stephen Snow, a high-
school teacher in New Port
Richey, Fla., invested in a new
boat this summer. Although he
would like to get a golf cart
too, Mr. Snow said his family
is waiting for their tax returnbefore making another large
purchase. “The way I look at
it, [the economy] is kind of up
and down,” he said.
Theslowerpaceofcon-
sumer spending in the third
quarter came despite a solid
financial foundation for many
U.S. households. The unem-ployment rate was at half-cen-
tury lows from July to Sep-
tember, and wages and
incomes rose. Consumer senti-
ment has remained strong in
recent months and rose
slightly in October, according
to the University of Michigan’s
Surveys of Consumers.
The housing sector was a
tailwind for growth as resi-
dential investment rose at a
5.1% annual pace. The boost,
which followed six straight
quarters of declines, likely re-
flected lower short-term inter-
est rates propelling construc-
tion and improvements.
The Commerce Department
data also offered evidence of
slowing corporate demand.
Nonresidential fixed invest-
ment—which reflects business
spending on software, re-
search and development,
equipment and structures—fell
at a 3.0% rate.
Business-investment data
can be volatile, but the weak
number suggests factors in-
cluding political uncertainty
and the outlook for trade tar-
iffs are weighing on business
decisions to spend on new
equipment and plants.WASHINGTON—U.S. eco-
nomic growth settled in at a
lower gear in the third quar-
ter, with consumer spending
and housing investment in-
creases offsetting a business
investment drop.
Gross domestic product—
the value of all goods and ser-
vices produced in the U.S.—
rose at an annual rate of 1.9%
from July through Septem-
ber—adjusted for inflation and
seasonality, the Commerce De-
partment said, compared with
2.0% in the second quarter.
The stronger-than-expected
growth rate—economists had
forecast 1.6%—was boosted by
government and consumer
spending, residential invest-
ment and exports. Still, busi-
ness spending declined for the
second quarter in a row. In-
vestment in structures
dropped sharply, particularly
those related to the petroleum
and natural-gas industries.
The Commerce Department
report showed the divergence
between relatively solid con-
sumer spending and falling
business investment continued
from the second quarter into
the third, as the trade war
with China escalated.
Hours after the GDP re-
port’s release, the Federal Re-
serve cut the benchmark fed-
eral-funds rate by a quarter
percentage point, to a range
between 1.50% and 1.75%, and
began to play down expecta-
tions for further cuts.
Consumer spending moder-
ated to a 2.9% annual rate in
the third quarter, from a 4.6%
rate in the second. From a
year earlier, consumer spend-
ing increased 2.5% in the
third quarter, roughly consis-
tent with the pace over the
past year.
Consumers are the lifeblood
of the U.S. economy, as their
spending accounts for nearly
70% of output. The report
showed their spending on big-
ticket items such as cars and
appliances slowed but re-BYHARRIETTORRYConsumer Spending Bolsters Growth
Grossdomesticproductgrewalmost2%fromsecondtothirdquarter,
beatingexpectations.Shrinkingbusinessinvestmentwasmostlyoffset
bygainsinconsumerspending.Source: Bureau of Economic AnalysisNote: Quarterly change in GDP is at an annualized rateQuarterlychange in GDP
501234%’19’18’17’16’15’14’13’12’11’Changein consumer spending
402%2015 ’16 ’17 ’18 ’3Q2019:1.9%
(1.6%projected)Change in business investment
80246%’19’18’17’16’holdrates steady.
Analysts said Mr. Powell sig-
naled an important if subtle
shift in the Fed’s approach to
further rate cuts.
From July until Wednesday,
“the data needed to improve for
the Fed not to cut,” said Mat-
thew Luzzetti, chief U.S. econo-
mist at Deutsche Bank. But go-
ing forward, “you need the data
to deteriorate to justify a cut.
That’s a new message from the
committee, which significantly
raises the bar,” he said.
Mr. Luzzetti said he expects
a slowdown in consumer spend-
ing and hiring to keep rate cuts
on the table at the Fed’s next
meeting, Dec. 10-11, and again
early next year.
Fed officials have now cut
rates three times since July to
cushion the economy against a
slowdown in business invest-
ment amplified by the U.S.-
China trade conflict. They
raised rates four times last year
to guard against unwanted in-
flation and financial bubbles.
Fed officials also recently be-
gan buying $60 billion a month
in short-term Treasury debt to
arrest recent volatility in
money markets, reversing atwo-year campaign to shrink
the central bank’s $4 trillion as-
set portfolio. The officials have
said the purchases are technical
in nature, but they have contrib-
uted to lower borrowing costs.
Separately, the Commerce
Department reported the econ-
omy expanded during the third
quarter at a 1.9% annual rate,
little changed from a 2% growth
rate in the second quarter and
around the pace Fed officials
expect to see over the long run.
“It’s consistent with an econ-
omy that’s just moving back to-
wards trend,” said Michael Fer-
oli, chief U.S. economist at
JPMorgan Chase & Co.
Consumer and government
spending and housing invest-
ment helped offset a second
consecutive quarterly fall in
business spending. Investment
in nonresidential structures
dropped sharply, particularly
those related to the petroleum
and natural gas industries.
Equipment spending on air-
craft also dropped amid the
continuing grounding of Boeing
Co.’s 737 MAX jetliner and
probes into the causes of two
deadly plane crashes involving
the Boeing plane.
Inflationary pressures,
meanwhile, remain restrained.ContinuedfromPageOneMr. Powell said Wednesday he
didn’t think the Fed would need
to raise rates anytime soon to
take back the recent cuts.
Given the recent decline in
business investment, the resil-
ience of consumer spending
and the health of the labor mar-
ket are likely to determine how
long the Fed’s timeout on rate
cuts will last.
“We think there is some risk
that the consumer disappoints
in the fourth quarter. That
could lead them to cut again,”
said Tiffany Wilding, U.S. econ-
omist at investment firm
Pimco.
In the weeks leading up to
the Fed meeting, the bank’s of-
ficials were less vocal about the
urgency of rate cuts than they
had been in the run-up to two
earlier reductions.
Weak business survey data
in early October led markets to
predict the central bank would
reduce rates, and those expec-
tations hardened after Fed offi-
cials didn’t publicly counter
them.
Fed officials don’t like to act
just because markets expect it.
But with investors assigning a
greater than 90% probability to
a rate cut in futures markets
over the past week, failing to
deliver could have led to a stock
selloff and higher borrowing
costs that would potentially un-
dercut the benefit of the Fed’s
recent cuts.
The bigger questions head-
ing into this week’s two-day
meeting were whether and how
Mr. Powell and his colleagues
would signal a pause in further
rate cuts.
Mr. Powell indicated Fed of-
ficials were now comfortable
entering a wait-and-see phase
by highlighting the accumula-
tion of the Fed’s recent rate
cuts, which he said would pro-
vide significant support for the
economy, and by noting how it
takes time for the bank’s moves
to ripple through the economy.
The officials have high-
lighted the accumulation of rate
cuts during past periods in
which they were ready to signal
an end to rate reductions, in-
cluding in 1996 and 1998.
Such an approach doesn’t al-
ways work out. In October 2007
and June 2008, Fed officials
tried to deliver similar mes-
sages, only to see a credit crisis
to deepen, forcing extensive
rate cuts.
Officials have cited three
reasons for trimming rates this
year: weakening global growth,
rising trade-policy uncertainty
and muted inflation. The U.S.-
China trade conflict worsened
immediately after the Fed made
its initial rate cut in July, but
the Trump administration took
steps this month to put trade
talks back on track.
Hiring has slowed this year
but to a pace strong enough to
push unemployment down to a
half-century low of 3.5% in Sep-
tember. Fed officials will see
two more employment reports
before their final scheduled
meeting of the year in Decem-
ber, including October data set
to be released Friday.
—Harriet Torry
contributed to this article.Fed
Reduces
Rates
Fed officials have
now reduced
interest rates three
times since July.
Consumer spending slowed in the third quarter but helped offset
a drop in business investment.SPENCERPLATT/GETTY IMAGESA2|Thursday,October31, 2019 THEWALLSTREETJOURNAL.**
U.S. NEWS
CAPITALACCOUNT|ByGregIp