Northwest Arkansas Democrat-Gazette
U.S. economy looks durable despite trade conflict risks
WASHINGTON — A series of government reports Wednesday cast a picture of a steadily growing U.S. economy, fueled by solid consumer spending and defying threats — at least for now — from a U.S.-China trade war and a global slowdown.
The Commerce Department estimated the economy grew at a moderate 2.1% annual rate over the summer, slightly better than previously estimated. Other reports showed stronger consumer spending and a rebound in orders for big-ticket manufactured goods.
For the July-September quarter, the rise in the gross domestic product, the economy’s total output of goods and services, exceeded the government’s initial estimate a month ago of a 1.9% annual rate. A key reason is businesses didn’t cut back on investment spending as much as first estimated.
The economy had begun the year with a sizzling 3.1% gross domestic product rate, fueled largely by the nowfaded effects of tax cuts and increased government spending.
Many analysts worry economic growth is slipping in the current October-December quarter to a 1.4% annual rate or less as business investment weakens further. But most say the slowdown won’t likely be as severe as it might have been because consumers, who drive about 70 percent of the economy, are signaling they will likely keep spending through the holiday shopping season and into next year. That spending is being supported by rising incomes and an unemployment rate near the lowest level in a half century.
Consumer spending gained some momentum entering the final three months of the year, with spending rising by a 0.3% annual rate in October, the fastest monthly pace in three months.
And in the U.S. manufacturing sector, which has been struggling with global economic weakness and damage from the Trump administration’s trade conflicts, orders for high-cost items rebounded in October by a 0.6% annual rate after having declined in September.
Economists said the flurry of reports depict an economy regaining its footing after absorbing threats this year, from the global slowdown to the intensifying trade war with China, which has perpetuated uncertainties for businesses. Many companies have suspended plans to expand and invest.
Still, the stock market has set record highs on optimism at least a preliminary U.S.-China trade agreement can be reached soon.
“We still expect GDP growth to slow a little further over the coming months, but the latest data suggest that the slowdown in the fourth quarter won’t be quite as bad as we had previously feared,” analysts at Capital Economics said in a note Wednesday.
The gross domestic product report showed business investment fell at a 2.7% annual rate in the July-September period, the second consecutive decline. Yet that drop was offset by a solid 2.9% gain in consumer spending.
Residential investment rebounded to an annual growth rate of 5.1% after six consecutive quarters of falling home investment. Analysts attribute the rebound in part to falling mortgage rates.
For the full year, economists think gross domestic product will expand 2.3%, down sharply from a 2.9% gain in 2018. Last year’s increase had been fueled by the $1.5 trillion tax cut President Donald Trump pushed through Congress and billions in additional spending for the military and domestic programs.
For 2020 as a whole, many economists envision growth of around 2%. That would be roughly the annual average since the recession ended in 2009. But it’s well below the 3%-plus economic growth rates Trump pledged to achieve with his program of tax cuts, deregulation and America-first trade policies.
The GDP report included the government’s first read on corporate earnings for the quarter. Pre-tax profit increased 0.2% from the prior three months and fell 0.8% from a year ago. That reflected a $6 billion reduction from legal settlements with Facebook and Google, according to the Commerce Department. Even excluding that effect, though, the pace of earnings increases was still relatively modest.
Inventory investment added 0.17 percentage point to the pace of GDP growth in the third quarter, according to the data, revised from an initially reported drag of 0.05 point.
The ongoing tariff war rattled companies again in October, with the U.S. merchandise trade deficit narrowing to the lowest level in more than a year. It was led by a drop in imports — particularly autos and consumer goods.
The ongoing tariff battle has been swinging numbers for the past year, as levies, threats, and turns in negotiations have companies front-loading orders one month and eating into their stockpiles and delaying new orders the next.
The U.S. added 15% tariffs Sept. 1 on $110 billion in Chinese imports, including popular purchases such as the Apple watch, clothing and shoes. As a result, imports of the items from China dropped in September, and it appears as if that’s continued into October.
At the same time, the boost in inventories and a smaller trade gap should help prop up data on the economy’s health. Barclays increased its estimate for fourth-quarter gross domestic product growth to 1.6% and Amherst Pierpont Securities bumped its up to 2.7%. Macroeconomic Advisers increased their gross domestic tracker to 1.9% for the final three months of the year.
Even though it’s increasing numbers for year-end, the overall trend is still negative, according to Barclays. Total U.S. exports also declined in October, hitting the lowest level since the start of 2018.
“While a narrower trade deficit may mechanically add to GDP growth,” wrote economist Michael Gapen, “underneath that veneer is further evidence of a softening in activity.
As recently as a few months ago, as U.S.-China trade tensions were escalating, global growth was slowing and financial markets were suffering losses, many analysts worried the economy might be on the verge of recession.
But the Federal Reserve, which had raised rates four times in 2018, began cutting rates in July, giving a boost to interest-rate sensitive sectors of the economy. This month, after its third rate cut of the year, the Fed signaled it would likely keep rates unchanged in coming months unless it saw signs of significant economic weakness.
In a speech Monday, Fed Chairman Jerome Powell expressed an optimistic view about the economy, saying with unemployment near a 50-year low of 3.6%, there’s still “plenty of room” for wages to rise and for more Americans to join the workforce.
Trump has attacked Powell and his colleagues for raising rates last year and for being slow to cut them this year. Heading into the 2020 presidential election, Trump may keep up his Fed attacks, seeing the central bank as a target if the economy starts to falter.
But the Fed is widely thought to have achieved its goal of a soft landing in which it’s slowed growth enough to keep the tightest job market in a half century from igniting inflation but not so much as to cause a downturn.