That’s exactly the kind of investment that the tax law was meant to encourage. So far, however, there is scant evidence that companies broadly are reinvesting their tax savings. Business investment in equipment has grown more slowly in the first half of the year, and many companies are choosing to pay dividends and buy back shares instead.
“Business spending is not picking up the way proponents of the tax cut had hoped,” said Michael Gapen, chief United States economist for Barclays.
Instead, the tax cuts seem to be encouraging consumer spending, which rose 4 percent in the spring quarter, the biggest increase since 2014. Increased federal spending — the result of the two-year budget deal passed by Congress this year — is likewise giving the economy a lift, helping to nudge G.D.P. growth out of the rut of 2 to 2.5 percent where it has spent much of the recovery.
Whether those policies are a good idea is another question. Many economists question the wisdom of passing what amounts to a deficit-funded stimulus package when unemployment is low and the economy is strong. Few outside the White House think a growth rate of 4 percent is sustainable in the long term, in part because the aging of the baby boom generation means a shrinking share of the American population is working.
“It’s economic conventional wisdom that in times like this you should prepare for the future and get your fiscal house in order, and we’re really doing the opposite,” said Michael A. Peterson, chairman of the Peter G. Peterson Foundation, which has long argued for reducing the federal deficit.
For policymakers at the Federal Reserve, the tax cuts and spending increases could pose a nearer-term challenge. The Fed has been trying to strike a delicate balance, raising interest rates gradually in an effort to keep inflation in check without snuffing out the recovery. If the second quarter’s growth rate continues, it could risk accelerating inflation and prompt the Fed to raise rates more quickly. That, in turn, could cause a recession.
There is little to suggest that will happen, however. Inflation slowed slightly in the second quarter, and Friday’s report is unlikely to persuade officials to deviate from their gradual and carefully devised march to higher interest rates. The central bank is on track to raise rates twice more this year, after two increases in the first half of the year.