BACK-TO-BACK GROWTH: The GDP expands at a 3.5% pace in the third quarter after a brisk 4.2% pace in the prior quarter.
The U.S. economy expanded at a 3.5% pace in the third quarter as consumers opened their wallets, businesses restocked inventories and governments boosted spending, marking the strongest back-to-back quarters of growth since 2014.
The annualized rate of gains in gross domestic product was brisker than expected — a Bloomberg survey showed a median estimate of 3.3% — and followed a 4.2% pace in the prior quarter, according to Friday’s report from the Commerce Department.
Consumer spending, which accounts for about 70% of the economy, unexpectedly accelerated to a 4% increase — the best since 2014 — while the 0.8% gain in nonresidential business investment was the weakest in almost two years. In two volatile categories, inventories provided the biggest contribution since early 2015, while the drag from trade was the largest in 33 years. Government spending rose the most since 2016.
The data indicate that a robust job market and lower taxes continued to propel demand, giving President Trump an opportunity to showcase his policies heading into the midterm congressional elections. At the same time, tariff-related bottlenecks and the U.S.China trade war are headwinds for the nation’s second-longest economic expansion on record. And the weakness in business investment suggests that the boost from corporate tax cuts may be wearing off.
The pickup in private and public consumption is “what you would expect” from fiscal stimulus, but the burst in business spending “looks to be fading,” said Michael Gapen, chief U.S. economist at Barclays and a former Federal Reserve official. “What we’re trying to ascertain is, is fiscal stimulus transitory or will it help sustain economic growth longer-term? This report shows the fiscal stimulus has a transitory response.”
Investors have become less sanguine on the outlook amid the latest run of U.S. company earnings reports. U.S. stocks and Treasury yields fell Friday, with shares dragged down by disappointing earnings reports from technology bellwethers Amazon.com Inc. and Alphabet Inc. on Thursday.
Amazon gave lowerthan-expected forecasts for revenue and operating income in the fourth quarter. Shares of Caterpillar Inc. tumbled this week after it said rising material and freight costs drove up its manufacturing costs.
More broadly, this month the International Monetary Fund cut its global growth forecast for the first time in two years, blaming escalating trade tensions and stresses in emerging markets. World GDP would fall further if Trump follows through on all his trade threats, including global duties on cars, the IMF said.
Excluding the volatile trade and inventories components of GDP, final sales to domestic purchasers increased at a 3.1% pace, slowing from 4%. Economists monitor this measure for a better sense of underlying demand. Excluding government spending, the measure of private demand also rose 3.1%.
Consumer spending compared with projections for a 3.3% advance, and followed the second quarter’s 3.8% gain. It contributed 2.69 percentage points to growth. Purchases rose across most major categories including motor vehicles, recreational goods, food and clothing, in part reflecting the support from steady hiring and the lowest unemployment rate in about five decades.
Hurricane Florence, which made landfall in North Carolina on Sept. 14, “disrupted consumption and business activities, including utilities,” while emergency and other services “likely increased in response to the disaster,” the Commerce Department said.
The government said it couldn’t estimate the effect of the storm on third-quarter GDP.
Even so, the GDP figures give Trump a timely talking point during campaign rallies and another chance to claim the robust expansion for his own after the biggest tax overhaul since the Reagan era. GDP rose 3% from a year earlier, the most on that basis since 2015 and matching the administration’s goal.
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. Borrowing costs also may keep rising, as investors project the Federal Reserve will raise the benchmark interest rate for a fourth time this year in December.