US third-quarter growth unrevised; headwinds increasing4 min read . Updated: 28 Nov 2018, 08:02 PM IST
US GDP increased at a 3.5% annualized rate, the Commerce Department said in its second estimate of third-quarter GDP growth
Washington: The US economy slowed in the third quarter as previously reported, but the pace was likely strong enough to keep growth on track to hit the Donald Trump administration’s 3% target this year, even as momentum appears to have moderated further early in the fourth quarter.
Gross domestic product increased at a 3.5% annualized rate, the Commerce Department said on Wednesday in its second estimate of third-quarter GDP growth. That was unchanged from its estimate in October and well above the economy’s growth potential, which economists estimate to be about 2%.
The economy grew at a 4.2% pace in the second quarter. While businesses accumulated inventory at a faster pace and spent more on equipment than initially thought in the third quarter, that was offset by downward revisions to consumer spending and exports.
Growth is being driven by the White House’s $1.5 trillion tax cut package, which has given consumer spending a jolt and supported business investment. The fiscal stimulus is part of measures adopted by President Donald Trump’s administration to boost annual growth to 3% on a sustainable basis.
The government also reported on Wednesday that after-tax corporate profits increased at a 3.3% rate last quarter after rising at a 2.1% pace in the second quarter.
An alternative measure of economic growth, gross domestic income (GDI), increased at a rate of 4.0% in the third quarter, quickening from the second quarter’s 0.9% pace.
The average of GDP and GDI, also referred to as gross domestic output and considered a better measure of economic activity, increased at a 3.8% rate in the July-September period, up from a 2.5% growth pace in the second quarter.
But dark clouds are gathering over the economic expansion that is now in its ninth year and the second longest on record. The goods trade deficit widened further in October, pressured by declining exports of soybeans, capital goods and automobiles, the Commerce Department said in another report on Wednesday.
Data released last week showed business spending on equipment weakening in October and it could remain tepid with Brent crude oil prices slumping by more than 30% from a four-year high above $86 in early October. Lower oil prices tend to hurt investment in the energy sector because of reduced profits.
The housing market is softening because of higher interest rates. In addition, General Motors Co said on Monday that it would cut thousands from its North American workforce, slash production and eliminate some slow-selling car models, which could have ripple effects on the domestic economy.
Solid third-quarter growth is expected to keep the Federal Reserve on course to raise interest rates in December for the fourth time this year, despite an escalation of criticism from Trump that tighter monetary policy is slowing down the economy.
The second estimate for the July-September quarter GDP growth was in line with economists’ expectations. US financial markets were little moved by the data.
Consumer spending revised lower
Growth estimates for the fourth-quarter are currently around a 2.5% pace. Economists expect GDP growth to slow further in 2019 as the fiscal stimulus fades and the effects of a bitter trade war with China as well as a strong dollar take their toll.
The third-quarter growth slowdown mostly reflected the impact of Beijing’s retaliatory tariffs on US exports, including soybeans. Farmers front-loaded shipments to China before the tariffs took effect in early July, boosting second-quarter growth. Since then, soybean exports have declined every month, increasing the trade deficit.
Imports increased a little bit faster in the third quarter than previously estimated while the drop in exports was much sharper, leading to an even wider trade gap, which sliced off 1.91 percentage points from GDP growth in the third quarter, instead of the 1.78 percentage points reported last month. That was the most since the second quarter of 1985.
The rebound in imports was partially driven by strong domestic demand and also reflected a rush by businesses to stockpile before US import duties, mostly on Chinese goods, came into effect late in the third quarter.
Imports subtract from GDP growth. But some of the imports likely ended up in warehouses, adding to the stockpile of inventory, which contributed to GDP. Inventories increased at an $86.6 billion rate, instead of the $76.3 billion rate estimated in October.
As a result, inventory investment added 2.27 percentage points to GDP growth. That was more than the 2.07 percentage points reported last month and was the biggest contribution since the fourth quarter of 2011. Growth in consumer spending, which accounts for more than two-thirds of US economic activity, increased at a 3.6% rate in the third quarter, down from the 4.0% rate estimated in October.
Business spending on equipment increased at a 3.5% rate, instead of the previously reported 0.4 percent rate. That was still the slowest pace in two years. The moderation in business spending has been blamed on the import tariffs, which are increasing manufacturing costs for companies, such as Caterpillar Inc, 3M Co and Ford Motor Co.
Some companies including Apple used their tax windfall to buy back shares on a massive scale.
This story has been published from a wire agency feed without modifications to the text. Only the headline has been changed.