Economy to grow 3.1 percent in 2018: CBO

The U.S. economy is growing briskly, at an estimated 3.1 percent this year, the Congressional Budget Office said Monday, though scorekeepers warned President Trump’s new tariffs could sap that strength.

And the analysts also cast doubt on Mr. Trump’s claims of a long-term surge, predicting the economy will cool off to about 2 percent growth by 2020 and fall even lower in future years as the effects of tax cuts and higher government spending wear off.

For now, the country is enjoying a boost. The economy grew at 4.1 percent from April through June, and the CBO said it will average 3.1 percent this year.

That’s slightly down from a 3.3 percent projection four months ago, which analysts chalked up to the government taking longer to spend the money that Congress has approved, but it’s better than the 2.2 percent rate in 2017.

“I think overall, we should be excited that we’re headed for the first year of 3 percent economic growth since 2005,” said Brian Riedl, a senior fellow at the Manhattan Institute. “That’s a victory and should be celebrated regardless of your political leanings.”

After this year, GDP growth will drop back to 2.4 percent in 2019, before averaging between 1.6 percent and 1.7 percent through 2028 as effects from the GOP’s tax cuts wear off and government spending goes back down, the CBO said.

Analysts also cautioned those numbers could become worse, depending on how Mr. Trump’s tariff battles play out.

“I think the strong economic consensus is that the tighter the president tightens the noose on free trade, the more it will backfire against the economic growth assumptions,” Mr. Riedl said. “That’s one policy that could ultimately reduce the growth over the long term.”

For example, the U.S. recently announced an additional $16 billion worth of tariffs on Chinese goods, bringing the total this year to $50 billion and prompting China to respond last week with its own 25 percent tariff on $16 billion worth of U.S. goods.

The economic effects of new tariffs “may become more substantial and have a larger effect on the economy than CBO accounted for in its current projections,” CBO director Keith Hall said.

Escalating tariffs could ultimately hurt U.S. exports by driving up production costs, and businesses could be less willing to make investments because of higher uncertainty, CBO said.

Mr. Trump has predicted the economy will keep roaring even with his trade battles. He said last month that the 4.1 percent growth rate wasn’t a “one-time shot” and that things would get even better once he starts announcing new trade deals.

“These numbers are very, very sustainable,” the president said.

But the short-term boost to the economy has also come at a significant price: CBO is also projecting a $793 billion budget deficit for 2018, well above the $665 billion deficit in 2017.

Analysts have warned that while the tax cuts and increased federal spending can give the economy a short-term jolt, the ensuing deficits will sap growth in the long run as borrowing increases and interest rates rise.

“Trump can’t make his numbers work — that is, a declining deficit and all the good things that he’s provided,” said Stan Collender, a longtime federal budget expert and an adjunct faculty member at Georgetown University’s McCourt School of Public Policy.

“He can’t make it look like he’s providing a free lunch unless the economy grows at levels that are just unexpected, unsustainable, and unmakeable,” he said. “The CBO numbers are a dose of cold water and fresh air on the economic outlook.”