U.S. Growth Above Forecast

The U.S. economy expanded at a faster pace than forecast in the third quarter, indicating resilient demand from consumers and businesses even with the hit from hurricanes Harvey and Irma, Commerce Department data showed Friday.

HIGHLIGHTS OF THIRD-QUARTER GDP (FIRST ESTIMATE)

  • Gross domestic product grew at a 3% annualized rate (est. 2.6%) following a 3.1% gain in 2Q, best back-to-back quarters since 2014
  • Consumer spending, biggest part of the economy, grew 2.4% (est. 2.1%) after 3.3% in 2Q
  • Business fixed investment rose 1.5%, adding 0.25 ppt to growth; spending on nonresidential structures fell, equipment and intellectual property gained, residential dropped
  • Trade, inventories added a combined 1.14 ppt to growth
  • Commerce Dept. said it can’t estimate hurricanes’ impact on GDP; disaster losses on fixed assets, private and public, totaled about $131.4b
  • Key Takeaways

    While GDP grew more than anticipated, analysts look to another key measure to assess the true health of the economy. Final sales to domestic purchasers, which strip out trade and inventories — the two most volatile components of the GDP calculation — climbed 1.8 percent, the slowest since early 2016, after rising 2.7 percent in prior quarter.

    The fallout from the hurricanes was mixed, probably depressing some figures while lifting others. The storms inflicted extensive damage on parts of Texas and Florida, though the effect is likely to be transitory as economic activity is expected to rebound amid rebuilding efforts.

    Consumer spending, which accounts for about 70 percent of the economy, added 1.6 percentage point to growth last quarter. That was driven by motor vehicles, as Americans replaced cars damaged by the storms, while services spending slowed to the weakest pace since 2013. Even so, a steady job market, contained inflation and low borrowing costs are expected to provide the wherewithal for households to sustain their spending.

    The first reading of GDP, the value of all goods and services produced, also showed continued strength in business investment, indicating growth is broadening out to more sources beyond household consumption. Companies are upbeat about the outlook and overseas markets are improving, which may help boost exports and contain the trade deficit.

    At the same time, the details of business investment showed a mixed picture. The decline in investment in structures probably reflects the hit from Hurricane Harvey, especially on oil and gas drilling.

    Residential investment remained a weak spot. Builders are up against a shortage of qualified labor and ready-to-build lots at the same time sales are being held back by a shortage of available properties that’s driving up prices.

    Price data in the GDP report showed inflation picked up while still lagging behind the Federal Reserve’s 2 percent goal. Excluding food and energy, the Fed’s preferred price index — which is tied to personal spending — rose at a 1.3 percent annualized rate last quarter, following a 0.9 percent gain.

    Fed policy makers can point to evidence that growth is steady enough to allow them to keep raising interest rates, with investors expecting a quarter-point increase in December.

    While the economy is probably on solid footing in the ninth year of this expansion, the central bank and many economists expect GDP growth to slow beyond 2018, moving closer to 2 percent rather than the sustained 3 percent pace that the Trump administration says will happen if its tax plan is enacted.

    Economist Views

    “Much of the key source data in the quarter was whipsawed by hurricane disruptions,” analysts at Bloomberg Economics wrote in a note before the report.

    “Before the devastating back-to-back hurricanes of Harvey and Irma, the U.S. economy was exhibiting strong momentum,” Sam Bullard, senior economist at Wells Fargo Securities LLC in Charlotte, North Carolina, wrote in an Oct. 22 note. “We are encouraged by the rebound in activity following the hurricanes’ landfall and expect GDP growth to firm” in the fourth quarter.

    “Hurricanes Harvey and Irma have distorted many of the economic data releases, but the impacts are transitory and should unwind without any significant effect on the underlying trends,” Scott Brown, chief economist at Raymond James Financial Inc. in St. Petersburg, Florida, said in a note before the report.

    Other Details

  • Nonresidential investment — which includes spending on equipment, structures and intellectual property — increased 3.9 percent and added 0.49 percentage point to growth
  • Equipment investment jumped 8.6 percent for a fourth quarter of growth, longest streak since 2014
  • Residential investment fell at a 6 percent rate after 7.3 percent drop, worst two-quarter performance since 2010
  • Net exports added 0.41 percentage point to growth as exports rose, imports fell; inventories added 0.73 point, most since 2016
  • Government spending fell at a 0.1 percent rate; the figures reflected 1.1 percent in federal spending, driven by defense, while state and local outlays dropped 0.9 percent
  • After-tax incomes adjusted for inflation increased at a 0.6 percent annual pace, down from the previous quarter’s 3.3 percent; saving rate fell to 3.4 percent from 3.8 percent
  • GDP report is the first of three estimates for the quarter; the other two are due in November and December as more data become available
  • Bloomberg

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    Dean Popplewell

    Dean Popplewell

    Vice-President of Market Analysis at MarketPulse
    Dean Popplewell has nearly two decades of experience trading currencies and fixed income instruments. He has a deep understanding of market fundamentals and the impact of global events on capital markets. He is respected among professional traders for his skilled analysis and career history as global head of trading for firms such as Scotia Capital and BMO Nesbitt Burns. Since joining OANDA in 2006, Dean has played an instrumental role in driving awareness of the forex market as an emerging asset class for retail investors, as well as providing expert counsel to a number of internal teams on how to best serve clients and industry stakeholders.
    Dean Popplewell