The Tax Cuts and Jobs Act had a clear impact on the U.S. economy last year, with several quarters of above-trend growth fueled by strong investment spending and, critically, elevated consumption. Its projected effects in 2019, though, were much less clear, and analysts grappled with a number of offsetting potential outcomes, particularly with regard to the consumer: the fact that withholding rates were not cut for the first six weeks of 2018 suggested greater refunds this year; the removal of state and local tax deductions suggested reduced refunds; and the elimination of roughly 85% of revenue from the Alternative Minimum Tax (AMT), which likely would have been reflected in annual payments in April this year, could also impact refunds throughout tax season.
 

Now two months into the year, the situation is becoming clearer, and it looks like the negative forces may be dragging down the positive ones. As shown in the chart below, refund values are tracking only slightly better than last year’s figures. While some may be quick to blame the disappointing data on administrative backlog due to the government shutdown, this does not seem to be the case: both filing numbers and the share of returns processed are relatively unchanged from this time last year. 
 

These weaker-than-expected tax refund figures are important. While fourth quarter GDP data, released earlier this week, showed yet another period of strong growth, those that expected this pace to continue into the first half of the year may be disappointed: elevated growth is predicated on high tax refunds lifting consumption through the first half of 2019. With this presently looking increasingly unlikely, the downshift in growth, though already anticipated, may occur faster than originally thought.
 

As we close out the quarter, investors should pay close attention to this unfolding development. Should refund data not improve and growth slow sooner than expected, pressure for the Federal Reserve to tighten this year may be relieved. 

Refunds are only modestly higher

Key tax refund statistics, 2019 YTD vs. 2018 YTD

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Source: U.S. Treasury Department, J.P. Morgan Asset Assesment.
Data are from filing season statistics for week ending February 22, 2019. Data are as of March 1, 2019.