U.S. economy grew solid 3.5 percent in the third quarter on strong consumer spending
Healthy consumer spending and business stockpiling helped keep the U.S. economy on a roll in the third quarter, more than offsetting the negative effects of President Trump’s escalating trade war.
The nation’s gross domestic product – the value of all goods and services produced in the economy – increased at a seasonally adjusted annual rate of 3.5 percent in the July- September period, the Commerce Department said Friday. That followed a 4.2 percent gain in the second quarter and marks the first time growth has topped 3 percent for two straight quarters since early 2015. Economists expected a 3.3 percent increase in output.
The economy has continued to benefit from federal tax cuts and spending increases, along with a 3.7 percent unemployment rate that marks a 50-year low and is nudging worker wages and buying power higher. So far, those forces have outweighed the fallout from U.S. trade standoffs with China and other countries.
President Trump has promised 3 percent growth over the long term, up from the tepid 2.2 percent pace that has characterized most of the nine-year-old economic expansion. Many analysts do expect growth of about 3 percent this year but predict a recession by 2020 as the recovery loses steam and the budget deficits spawned by the tax and spending stimulus help push up interest rates.
Consumers drive gains
Consumer spending grew a robust 4 percent, up from 3.8 percent in the second quarter. Wage growth has picked up to close to 3 percent in recent months as employers bid up to attract a shrinking pool of available workers. Monthly job gains have averaged more than 200,000 this year despite the worker shortages. And consumer confidence hit an 18-year high last month.
Meanwhile, the tax cuts have left Americans with bigger paychecks. Consumer spending makes up about 70 percent of economic activity.
Business stockpiling surges, investment slows
Businesses aggressively replenished inventories, adding more than two percentage points to growth. Such stockpiling is cyclical and a big rebound was expected after companies added to stocks more slowly the prior quarter.
Business investment, however, slowed substantially, increasing 0.8 percent following an 8.7 percent advance in the second quarter. Equipment spending ticked up 0.4 percent.
Some measures of business confidence have dipped recently as a result of the trade conflicts, which are raising import prices and dampening exports. That’s partly offsetting the positive effects of the tax cuts, which have sharply reduced rates and provided businesses more incentives to invest.
Government spending rises
Government spending grew 3.3 percent after rising 2.5 percent in the second quarter. Federal spending increased 3.3 percent boosted by a 4.6 percent jump in defense outlays, while state and local government spending rose 3.2 percent.
The budget deal Congress passed in March is lifting government outlays, though the effects are likely to fade by the second half of next year.
Trade fight hurts growth
Exports fell 3.5 percent while imports increased 9.1 percent, widening the nation’s trade deficit.
The U.S. has imposed tariffs on $250 billion in Chinese imports while China has retaliated with duties on nearly all of the $130 billion in goods it imports from the U.S. The conflict actually boosted the US economy in the second quarter as overseas business loaded up on U.S. soybeans ahead of China’s countertariffs.
That, however, may have led to a pullback in American exports in the third quarter that was magnified by the Chinese tariffs, which are making U.S. shipments more expensive.
Housing construction falls again
Residential investment fell for the third straight month, slipping 4 percent. Despite low housing supplies nationwide, home builders have faced construction worker shortages and higher material costs.
In recent months, those obstacles have been compounded by rising mortgage rates and prices that remain high despite a recent slowdown in appreciation.
This was the government’s first estimate of economic growth in the third quarter. It will publish two revised estimates by the end of the year.