U.S. Economy Grew 2% in Third Quarter, Led by Consumer Spending

How Much Could the U.S. Economy Grow Next Year?

The U.S. economy expanded at a revised 2 percent annualized rate in the third quarter, buoyed by consumer spending as businesses struggled to sell to overseas customers battered by sluggish growth.

The gain in gross domestic product followed a 3.9 percent advance in the second quarter, Commerce Department figures showed Tuesday in Washington. The median forecast of 76 economists surveyed by Bloomberg called for a 1.9 percent increase compared with the previously reported 2.1 percent pace.

Even with the slight reduction in growth, household purchases propelled demand last quarter as employment improved and fuel prices remained low. Nonetheless, consumers alone won’t be able to shoulder the burden of helping the world’s largest economy overcome slower global growth, so areas such as business investment and government outlays will also need to strengthen.

“Consumption is a big piece of it, and it’s chugging along,” said Tim Quinlan, an economist at Wells Fargo Securities LLC in Charlotte, North Carolina, who correctly projected the growth pace. At the same time, “it’s hard to be really enthusiastic about the outlook for trade and business investment” amid weak growth overseas, he said.

Economists’ projections for GDP, the value of all goods and services produced, ranged from 1.5 percent to 2.1 percent. The latest estimate is the third for the quarter and the reading won’t be updated again until annual revisions are issued in July of 2016.

The economy grew at an average pace of 2.3 percent in the first half of the year after expanding 2.4 percent in all of 2014.

Inventory Adjustment

The slight reduction in third-quarter growth reflected a smaller increase in inventories than previously estimated. Consumer spending was little changed from the prior report as a reduction in outlays on financial services was offset by a bigger gain among non-profit agencies serving households.

Weaker overseas growth and a strong dollar have weighed on net exports, with trade subtracting 0.3 percentage point from overall growth after adding 0.2 percentage point in the prior three-month period. Sustained growth in the U.S. combined with weakening in other parts of the globe, including in China, could widen the gap between exports and imports in the quarters ahead.

Inventories subtracted 0.7 percentage points from growth compared with a previous estimate of a 0.6 percentage-point drag. A buildup in stockpiles for much of this year, exacerbated by weaker-than-expected overseas demand, is still being drawn down.

Business Investment

Corporate spending on equipment advanced at a 9.9 percent annualized pace, adding 0.6 percentage point to growth and the biggest gain in a year.

Household purchases, which account for almost 70 percent of the economy, rose at a 3 percent annual pace, the same as previously estimated. Personal consumption added 2 percentage points to growth.

Steady payroll gains and cheap gasoline are helping support Americans. Payrolls have advanced at a 210,000 average monthly pace this year through November, compared with a 260,000 average for all of 2014 that was the strongest in 15 years.

Costs at the gas pump are at their lowest since 2009, having fallen steadily for four months on a slide in global commodity prices. The average price of a gallon of regular gasoline was $2.00 as of Dec. 20, the lowest since March 2009, according to auto group AAA. That compares with a daily average in 2014 of $3.34 per gallon.

Government Outlays

Cutbacks in public spending also will probably no longer hinder growth in 2016 after Congress and the Obama administration agreed last week to fund the government through September.

Outlays at the federal level will grow 2.6 percent next year, the first gain since 2010, according to Dec. 18 estimates by economists at Goldman Sachs Group Inc. in New York.

The momentum in U.S. demand has given Federal Reserve policy makers enough confidence that the economy can withstand the first increase in the benchmark interest rate in almost a decade. Chair Janet Yellen announced Dec. 16 that the central bankers unanimously voted to raise the rate by a quarter-point from near-zero.

“The economic recovery has clearly come a long way, although it is not yet complete,” Yellen told a press conference in Washington. “The committee currently expects that, with gradual adjustments in the stance of monetary policy, economic activity will continue to expand at a moderate pace and labor market indicators will continue to strengthen.”

Policy makers’ forecasts show the central bank will raise the benchmark interest rate by 1 percentage point next year.

“The U.S. economy is really just chugging along at a fairly middling pace, but it’s enough for the Fed to continue delivering rate hikes,” said Goldberg at TD Securities.

Tuesday’s GDP report also showed prices tied to consumer spending excluding food and fuel rose at a faster pace in the third quarter than previously estimated, which may also alleviate concern with too-low inflation. The core consumption price index climbed at 1.4 percent annualized rate from July through September compared with the 1.3 percent gain previously reported.

(Updates with economist comment in fourth paragraph.)

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