U.S. Economy Weathers Storms to Post Solid Third-Quarter Growth

  • Consumption, business-equipment spending drive expansion
  • Whether 3% pace can be sustained still remains to be seen

Jim Paulsen Sees Stimulus Prematurely Ending Recovery

The U.S. economy stood tall last quarter against one of the most active Atlantic hurricane seasons in history.

Inflation-adjusted gross domestic product advanced at a 3 percent annualized rate from July through September, exceeding the median projection in a Bloomberg survey, amid steady consumption and continued strong business-equipment spending, Commerce Department figures showed Friday. Combined with the 3.1 percent pace in the prior quarter, the economy put in its best six-month performance since 2014.

The deleterious effects of hurricanes Harvey and Irma on so-called final demand were indicated in figures showing weaker outlays for structures such as oil and gas well drilling equipment and less home construction. At the same time, household spending was firmer than forecast as Americans in storm-affected areas of the country went car shopping to replace damaged vehicles.

After the report, investors remained relatively certain that the Federal Reserve will raise interest rates in December, according to futures markets. Treasury yields and the dollar rose before giving back gains, while the S&P 500 stock index was on track for its biggest advance this week.

“It really illustrates the resiliency and vibrancy of the U.S. economic expansion right now,” said Scott Anderson, chief economist at Bank of the West in San Francisco. Strength in trade and business investment represents a “new element that broadens the economic expansion and probably makes it a lot more resilient to shocks like hurricanes.”

See Bloomberg Economics’s take on the data: Growth looks good, not great

Third-quarter outlays by businesses for equipment grew at an 8.6 percent annualized pace, almost matching the 8.8 percent rate of the previous three months. That marked the best consecutive quarters in three years.

Highlights of Third-Quarter GDP (First Estimate)

  • Consumer spending, biggest part of the economy, grew 2.4% (est. 2.1%) after 3.3% in 2Q
  • Business fixed investment rose 1.5%, adding 0.25 ppt to growth; spending on nonresidential structures fell, equipment and intellectual property gained, residential dropped
  • Trade, inventories added a combined 1.14 ppt to growth
  • Real final sales to domestic purchasers rose at a 1.8% rate, slowest since 1Q 2016

A separate report on Friday showed consumer sentiment climbed in October to the highest level since the start of 2004. More than half of all respondents in the University of Michigan survey said they anticipated the good times would persist in the coming year.

While the economy is on relatively solid footing in the ninth year of this expansion, it’s probably too early for President Donald Trump to claim victory that growth has reached a sustainable 3 percent pace. The Fed and many economists expect GDP growth to slow beyond 2018, moving closer to 2 percent. Trump and Republicans are pressing to enact tax cuts that they say will boost expansion.

“Tax-plan scorekeepers and monetary policy makers alike should be cautious not to become overly optimistic about the economy’s prospects,” analysts at Bloomberg Economics wrote in a note.

Analysts also look at another key measure to assess the true health of the economy. Final sales to domestic purchasers, which strip out trade and inventories -- the two most volatile components of the GDP calculation -- climbed 1.8 percent, the slowest since early 2016, after rising 2.7 percent in prior quarter.

Residential investment also remained a weak spot, restrained in part by the weather. It fell at a 6 percent rate after a 7.3 percent drop, the worst two-quarter performance since 2010.

Price data in the GDP report showed inflation picked up while still lagging behind the Fed’s 2 percent goal. Excluding food and energy, the Fed’s preferred price index -- which is tied to personal spending -- rose at a 1.3 percent annualized rate last quarter, following a 0.9 percent gain.

Steady Growth

Even so, Fed policy makers can point to evidence that growth is steady enough to allow them to keep raising interest rates, with investors expecting a quarter-point increase in December.

“The main message is that underlying activity in the economy remains solid,’’ said Michael Gapen, chief U.S. economist at Barclays Plc. Seasonal adjustments probably helped, the weather was a smaller drag than expected, and “synchronized global growth is providing a tailwind to domestic activity.” That’s showing up in faster exports growth and quicker inventory accumulation, Gapen said.

While the Fed may deliberate on inflation, “there’s no disagreement on the economy and the labor market,” said Gapen, who formerly worked at the central bank. “The clear signal is that domestic activity is solid, and the labor market is solid. That makes it easier for the Fed to raise rates in December.”

— With assistance by Agnel Philip

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