U.S. GDP report shows economy grew at a slower pace

30 October, 2018, 12:28 | Author: Shannon Aguilar
  • US economy grows 3.5% in 3Q as consumers, government spending boosts GDP

Bloomberg's USA chief economist Carl Riccadonna said following the report that, "The composition of growth in the third quarter has some important implications".

"The American consumer continues to be the hero of the economy, with the 3.5 percent GDP beating estimates, supported by a healthy increase in disposable personal income", Robert Frick, corporate economist at Navy Federal Credit Union, told ConsumerAffairs.

It marked a slowdown from the 4.2 per cent pace in the second quarter, but was better than the 3.3 per cent expansion economists had predicted.

Ian Shepherson, an economist at Pantheon Macroeconomics, said of Friday's report, "In one line: Strong GDP growth hides soft capex and massive trade deterioration".

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. The fiscal stimulus is part of measures adopted by President Donald Trump's administration to boost annual growth to 3 percent on a sustainable basis.

Yet a trade war exists between Washington and Beijing as well as other trade disputes between the US and other trade partners, with the slowdown last quarter mostly reflecting the retaliatory tariffs impact that Beijing imposed on exports from the USA including soybeans.

Net exports also declined from a surge last quarter as manufacturers and farmers rushed to sell their goods overseas in advance of expected retaliatory tariffs from China.

The other facet of the coin is that imports, which represent a cost to GDP, have paradoxically strongly increased (+9.1 per cent) in spite of the customs taxes.

Economists estimate the widening trade gap chopped off nearly 2 percentage points from GDP growth in the third quarter, which would reverse the 1.22 percentage point contribution in the April-June period.

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As a result, inventory investment added 2.07 percentage points to GDP growth, the biggest contribution since the first quarter of 2015, after slicing off 1.1 percentage points from output in the second quarter.

With the unemployment rate at its lowest mark since 1969, the Fed has been raising interest rates to prevent annual inflation from taking off. Prices now are rising at an annual rate of 2 percent, according to the Fed's preferred gauge.

Solid third-quarter growth is expected to keep the Federal Reserve on course to raise interest rates again in December, despite a recent tightening in financial market conditions brought about by a stock market sell-off and a rise in U.S. Treasury yields.

Gross domestic product - the value of all goods and services produced in the US - grew at a seasonally and inflation-adjusted annual rate of 3.5% from July through September, the Commerce Department said Friday.

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.

Government spending rose at a pace of 3.3% during the third quarter, the fastest since the first quarter of 2016. The second quarter's pace of growth was the best in four years. Excluding food and energy, the central bank's preferred price index also rose at a 1.6% rate. Imports are a drag on GDP growth.

On Friday, October 26, the USA stock market fell again.

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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