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)
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.
“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.
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