Tax breaks may help prop up the economy — for now

Now that we’re in the new year, the stimulus measures in last year’s tax law are starting to take effect.

Economists expect those tax breaks to boost economic growth in the short-run, but the benefits might not last for long.

A lot of the perks from last year’s budget law are for businesses, said Ben Ayers, senior economist at Nationwide.

“So you have things like full expensing for manufacturing expenses. We have increased deductions for interest and research and development expenses,” he said.

Ayers said those tax benefits are encouraging businesses to spend.

“Slowly over the course of the year, you’re going to be hearing more about many businesses saying this is a good time to expand, and we’re going to make some investment, and probably add some more workers as well, as we look out over ‘26,” he said.

Individual taxpayers are going to see some benefits, too: The average refund will increase by about $800 this year, said David Kelly, chief strategist at JP Morgan Asset Management.

He said the bulk of that will go to people with lower incomes, who are more likely to spend it.

“And so I expect that you’re going to see more spending on just basics — groceries, clothing, some appliances,” he said.

Kelly said he expects all of that consumer spending to push up gross domestic product in the first half of the year. But he doesn’t expect a lasting impact on the economy.

“Because we’re going to find it very hard to sustain that level of consumer spending that we’re going to achieve in the first half of the year. So it’s going to start out hot, and then I think it’s going to cool down a lot,” he said.

Meanwhile, Kelly said, the Trump administration’s immigration restrictions will counteract many of the benefits of last year’s tax law.

He said those policies are shrinking the workforce, which can put the brakes on business spending.

“It means it's hard to find workers. But lots of businesses, who might have started up — might open a restaurant on the other side of town, if you thought you could hire staff, but if you don’t think you’re going to hire staff, maybe just don’t do it at all,” Kelly said.

Immigration restrictions are going to have an outsized impact on particular sectors of the economy, said Kate Bahn, chief economist at the Institute for Women’s Policy Research.

“Things like health care support, food preparation, construction, child care,” she said.

Bahn said as the Trump administration forcibly removes workers from the U.S. and discourages new ones from entering, it’s harder for consumers — native and foreign-born — to get the services they need.

“The most clear-cut example would be things like child care workers. If you don’t have access to child care because there’s no child care workers, and you’re a parent of young children, then you cannot go to your job,” Bahn said.

A shrinking workforce will make it harder for people to spend money on goods and services. And for the economy to produce them.

“I mean that’s what GDP is. It’s how many goods and services have been created. And if you have fewer workers, you’re creating fewer goods and services,” Bahn said.

Kelly at JP Morgan Chase said they expect GDP growth will slow, from a 3% annual rate in the first half of the year, to about 1% by the fourth quarter.