The U.S. economy expanded at a 3.5 percent pace in the third quarter as
consumers opened their wallets, businesses restocked inventories and
governments boosted spending, marking the strongest back-to-back quarters of
growth since 2014.
The annualized rate of gains in gross domestic product compared with the
3.3 percent median estimate in a Bloomberg survey and followed a 4.2
percent advance in the prior three months, according to Friday’s report from
the Commerce Department.
Consumer spending, which accounts for about 70 percent of the economy,
unexpectedly accelerated to a 4 percent increase -- the best since 2014 --
while the 0.8 percent gain in nonresidential business investment was the
weakest in almost two years. In two volatile categories, inventories provided
the biggest contribution since early 2015, while the drag from trade was the
largest in 33 years. Government spending rose by the most since 2016
The data indicate a robust job market and lower taxes continued to propel
demand, giving President Donald Trump an opportunity to showcase his policies
heading into the midterm congressional elections. At the same time,
tariff-related bottlenecks and the trade war with China are headwinds for the
nation’s second-longest economic expansion on record, while the weakness in
business investment suggests the boost from corporate tax cuts may be wearing
off.
The pickup in private and public consumption is “what you would expect”
from fiscal stimulus, but the burst in business spending “looks to be fading,”
said Michael Gapen, chief U.S. economist at Barclays Plc and a former Federal
Reserve official. “What we’re trying to ascertain is, is fiscal stimulus
transitory or will it help sustain economic growth longer-term? This report
shows the fiscal stimulus has a transitory response.”
Investors have become less sanguine on the outlook amid the latest run of
U.S. company earnings reports. U.S. stocks and Treasury yields were lower on
Friday, with shares dragged down by disappointing earnings reports from
technology bellwethers Amazon.com Inc. and Alphabet Inc. on Thursday.
Amazon gave lower-than-expected forecasts for revenue and operating income
in the fourth quarter, while shares of Caterpillar Inc. tumbled earlier this
week after the maker of mining and construction equipment said manufacturing
costs were higher due to rising material and freight costs.
More broadly, the International Monetary Fund earlier this month cut its
global growth forecast for the first time in two years, blaming escalating
trade tensions and stresses in emerging markets. World GDP would fall further
should Trump follow through on all his trade threats, including global duties
on cars, the IMF said.
Final Demand
Excluding the volatile trade and inventories components of GDP, final sales
to domestic purchasers increased at a 3.1 percent pace, slowing from 4 percent.
Economists monitor this measure for a better sense of underlying demand.
Excluding government spending, the measure of private demand also rose 3.1
percent.
Consumer spending compared with projections for a 3.3 percent advance, and
followed the second quarter’s 3.8 percent gain. It contributed 2.69 percentage
points to growth. Purchases rose across most major categories including motor
vehicles, recreational goods, food and clothing, in part reflecting the support
from steady hiring and the lowest unemployment rate in about five decades.
Hurricane Florence, which made landfall in North Carolina on Sept. 14,
“disrupted consumption and business activities, including utilities,” while
emergency and other services “likely increased in response to the disaster,”
the Commerce Department said. The government said it couldn’t estimate the
overall impact of the storm on third-quarter GDP.
Talking Point
Even so, the GDP figures give Trump a timely talking point during campaign
rallies, and yet another chance to claim the robust expansion for his own
following the biggest tax overhaul since the Reagan era. GDP rose 3 percent
from a year earlier, the most on that basis since 2015 and matching the
administration’s goal.
Yet growth is expected to moderate in 2019 as the effects of the tax cuts
wane, while tariffs and a strong dollar weigh on the economy. Borrowing costs
also may keep rising, as investors project the Federal Reserve will raise the
benchmark interest rate for a fourth time this year in December.
Even with growth and employment above what most analysts and central
bankers see as the economy’s sustainable capacity, inflation remains contained.
Price data in the GDP report showed inflation at a 1.6 percent annualized pace
last quarter, below the Fed’s 2 percent goal. Excluding food and energy,
the central bank’s preferred price index also rose at a 1.6 percent rate.
Business Investment
Nonresidential fixed investment -- which includes spending on equipment,
structures and intellectual property -- contributed just 0.12 percentage point
to growth, following 1.15 point in the second quarter.
Within that category, spending on structures shrank 7.9 percent, the
biggest drop in almost three years, following a 14.5 percent surge in the prior
period that partly reflected investment in oil production. Equipment investment
cooled to a 0.4 percent advance, the slowest since 2016, and the rise in intellectual-
property spending eased to a three-quarter low of 7.9 percent.
Housing remained a weak spot, posing the third consecutive drag on GDP
growth, with a contraction of 4 percent. Recent reports indicate the industry
is slowing amid higher prices and rising mortgage rates, as well as a lack of
affordable listings.
Inventories, Trade
GDP growth last quarter benefited from a rebuilding of inventories, which
dragged down expansion in the prior period amid tariff-related supply-chain
disruptions and steady demand. The third-quarter increase was broad-based and
led by wholesale trade, particularly farm products, and manufacturing,
according to the Commerce Department.
The trade component reflected a widening deficit, with a 3.5 percent
decline in exports and a 9.1 percent increase in imports. That was driven by an
unwinding of the hefty boost from net exports in the second quarter when U.S.
exporters of soybeans and other products accelerated shipments to beat
retaliatory tariffs from abroad.
Solid domestic demand and some front-loading of imports ahead of a January
rise in levies on Chinese goods may further widen the trade gap.