GDP Grows 3.5% on Consumers, Inventories' Spending

Roman Schwartz
October 30, 2018

While that was a slowdown from a 4.2% pace in the second quarter, it still exceeded the economy's growth potential, which economists put at 2%.

"Next year, as the boost from fiscal stimulus is fading and the lagged impact of higher interest rates begins to weigh more heavily, we expect GDP growth to slow below its 2% potential pace", Michael Pearce, senior USA economist at Capital Economics, said in a note.

That was the fastest pace since the fourth quarter of 2014 and followed a 3.8% pace of increase in the second quarter. Friday's GDP report provides more support for this thesis, with government spending rising more than 3 percent in the quarter. "The strength in real PCE in Q2 (3.8%) and Q3 likely reflects, at least in part, the boost to real disposable income that was delivered by reductions in personal income tax rates earlier this year".

Gregory Daco, chief US economist for Oxford Economics, said he expects more modest GDP growth in coming quarters, citing the fading impact of the tax cuts, higher interest rates from the Federal Reserve and increasing trade tensions.

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.

Consumer spending (which accounts for two-thirds of United States economic activity) increased by 4 per cent, its fastest rate in almost four years, Efe news reported.

The GDP report Friday was the government's first of three reviews of overall economic activity for the July-September period.

China's economic growth is expected to reach around 6.6 percent in 2018, according to a research report jointly released by Economic Information Daily, Xiamen University and University of London on Thursday. "The "second" estimate for the third quarter, based on more complete data, will be released on November 28".

This is published unedited from the PTI feed.

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"Growth figures are likely to slow from here heading into 2019, but there are still plenty of signs of further expansion for the US ahead", Nationwide Senior Economist Ben Ayers said via email. Government spending rose by the most since 2016.

However, the drag from trade was probably offset by faster inventory accumulation by businesses stockpiling before USA import duties, on mostly in Chinese goods, came into effect. The report was one of the last major economic indicators before Election Day (there will be one more jobs report released November 2).

In the end, simultaneous spikes in investment and consumer spending could balance each other out, leaving the price of most goods largely unchanged.

However, strong demand in the US brought in large numbers of imported motor vehicles and consumer goods.

"The stock market is going to go up and down", he said.

The central bank has raised rates three times this year and signalled it will raise rates one more time this year and expect to raise rates three times in 2019.

"While business spendings vary substantially quarter over quarter, the slow down came earlier than expected by many economists as a sign of the fading impact of corporate tax cuts and fiscal stimulus", he said.

Housing continued to be a drag, falling for a third straight quarter.

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