Published: Tue, October 30, 2018
Finance | By Gustavo Carr

United States economy grows 3.5% in 3Q as consumers, government spending boosts GDP

United States economy grows 3.5% in 3Q as consumers, government spending boosts GDP

Strong consumer and government spending powered economic growth in the third quarter, although a warning sign about the outlook emerged in the form of weak business investment.

The US economy grew by 3.5% in the third quarter, according to Friday's GDP report.

Fed officials have recently talked about "optimism and acceleration in capital spending and could it lift the supply side", but the slowing in business investment "is inconsistent with a sizable improvement in spending", said Michael Gapen, chief US economist at Barclays Plc and a former official at the central bank.

Wall Street closed sharply lower but markets were less moved by the GDP data than by disappointing earnings.

Excluding the effects of trade and inventories, GDP grew at a 3.1% rate in the third quarter compared to a 4% pace in April-June.

The drag on GDP was the largest negative contribution to GDP growth for trade in 33 years - trade subtracted 1.91 points from GDP in the second quarter of 1985. Consumption has been supported in part by a tightening labor market, characterized by an unemployment rate that is near a 49-year low of 3.7 percent. That hasn't happened since 2005.

The U.S. economy likely slowed in the third quarter, held back by a tariff-related drop in soybean exports, but the pace probably remained strong enough to stay on track to hit the Trump administration's 3 percent target this year.

But business spending on equipment stalled in the third quarter and residential investment contracted for the third quarter in a row, adding to growing headwinds for the economy.

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The report showed that consumer spending, which accounts for 70 per cent of economic activity, surged at an annual rate of 4 per cent in the third quarter, even better than the 3.8 per cent gain in the second quarter and the best showing since last 2014.

The annualized rate of gains in gross domestic product compared with the 3.3% median estimate in a Bloomberg survey and followed a 4.2% advance in the prior three months, according to the October 26 report from the Commerce Department.

The central bank has raised rates three times this year and signalled it will raise rates one more time this year and expect to raise rates three times in 2019.

"This may have reflected front-loading of imports (which increased at a 9.1% rate) ahead of scheduled tariff increases - imports which then end up temporarily in stockpiles", Feroli said.

"Next year, as the boost from fiscal stimulus is fading and the lagged impact of higher interest rates begins to weigh more heavily, we expect GDP growth to slow below its 2% potential pace", Michael Pearce, senior USA economist at Capital Economics, said in a note.

After stripping out the volatile categories of trade, inventories and government spending, final sales of domestic product rose at an annual rate of 1.4% - lower than the overall GDP number. There were also decreases in exports of petroleum and non-automative capital goods. "It appears most business leaders have become somewhat cautious about the future and are holding off committing to major investment plans", said Joel Naroff, chief economist at Naroff Economic Advisors in Holland, Pennsylvania. In addition, the stock market turmoil is seen reducing household wealth.

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.

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