Economy in Q3 grew 1.9% pre cuts
Housing rebound, consumer spending key
Neither trade wars nor stock jitters are deterring American consumers, who continue to prop up the economy.
The economy slowed but still grew solidly in the third quarter as steady consumer spending and a rebound in housing offset another pullback in business investment sparked by trade and global troubles.
The nation’s gross domestic product – the value of all goods and services produced in the U.S. – increased at a seasonally adjusted annual rate of 1.9% in the July-September period, following 2% growth in the second quarter, the Commerce Department said Friday. Economists forecast a 1.6% gain.
The report came out just hours before the Federal Reserve cut interest rates on Wednesday, the third decrease in three months in a campaign to ward off a possible recession. The risk of a downturn has eased somewhat in recent weeks after the U.S. and China agreed to a tentative truce in their trade war that likely suspends future tariffs on Chinese imports but leaves existing duties in place.
Also, the risk of a “hard Brexit” that doesn’t include trade agreements between Britain and Europe has ebbed. And long-term Treasury bond yields have edged back above short-term rates, reversing a so-called “inverted yield curve” that had signaled a bleak outlook.
But the trade fight is still dampening business confidence and invest
ment, compounding the effects of a sluggish global economy that has hurt U.S. manufacturing. And the lift to the economy from federal tax cuts and spending increases spearheaded by President Trump increases is fading. Wells Fargo predicts the economy will grow 1.5% the second half of the year, down from about 2.5% the first half, and 1.7% in the first half of 2020.
Many economists still foresee an elevated risk of recession next year as Trump heads into a presidential election in November.
Consumer spending rises
Consumer spending grew a solid 2.9% in the third quarter, below the blistering 4.6% pace in the second quarter but more than expected. Consumers generally have shrugged off the trade standoff, which has started to increase retail prices.
Job growth has slowed but the unemployment rate dropped to a new 50year low of 3.5% in September and wages have been rising about 3% annually, putting more money in shoppers’ pockets. The stock market, while volatile, has notched record highs recently.
Consumption makes up about 70% of economic activity.
Business investment declines
Business investment fell 3% after dropping 1% in the second quarter. Outlays on structures fell 15.3%, partly because of a pullback in oil drilling amid lower prices, while spending on equipment dropped 3.8%.
The trade war has increased the price of many Chinese imports, including factory parts and retail products, squeezing manufacturers and retailers. The impasse, along with feeble growth overseas, also has curtailed U.S. exports. The trade battle also has generated uncertainty, prompting companies to hold off on new projects.
Residential investment bounces back
Construction of new single-family homes and apartments, along with renovations, rose 5.1%, breaking a streak of six consecutive quarterly declines. Average 30-year fixed mortgage rates have fallen to 3.75% from 4.86% a year ago, juicing home purchases and construction. That has helped offset a shortage of labor and available lots that have constrained builders.
Government outlays increase
Federal, state and local spending increased 2%, down from a 4.8% rise in the second quarter. Federal outlays rose 3.4% while state and local edged up 1.1%. The $300 billion in additional federal spending approved by Congress in early 2018 continued to boost the economy but the stimulus is expected to lose steam by late this year.
Trade is a drag on growth
U.S. exports rose 0.7%, following a 5.7% drop in the second quarter. Trump’s tariffs on $360 billion in Chinese imports have sparked counter-tariffs by China that have curtailed shipments of soybeans, vegetables and other products. Meanwhile, imports increased 1.2%.