United States: Economy accelerates in Q3 supported by external sector

Preliminary data shows that the U.S. economy gathered momentum in the third quarter. GDP expanded at a seasonally-adjusted annualized rate (SAAR) of 2.9%, according to an estimate released by the Bureau of Economic Analysis (BEA) on 28 October. The reading, which overshot the 2.4% increase expected by the markets, was an improvement on the 1.4% increase recorded in the previous quarter and marked the fastest expansion in two years. U.S. GDP data are frequently revised as the initial estimate is based largely on data for the first two months, but the provisional estimate of robust growth increases the likelihood that the Fed will increase rates in December. A year-on-year comparison showed that GDP increased 1.5%, which came in above the previous quarter’s 1.3% rise.

Domestic demand was stronger in Q3 than in Q2, mainly due to faster growth in government consumption and a softer contraction in fixed investment. Growth in private consumption decelerated from 4.3% in Q2 to 2.1% in Q3 mainly due to a decline in purchases of goods. However, this is not expected to last long as a tighter labor market and the gradual increase in wages should continue supporting private consumption in the fourth quarter. Conversely, government consumption rebounded and grew 0.5% in Q3, which contrasted the 1.7% drop observed in the second quarter. Fixed investment dropped 0.6% in Q3, which was somewhat an improvement over the previous quarter’s 1.1% drop.

On the external side of the economy, exports of goods and services grew an impressive 10.0% in the third quarter due to a surge in soybean exports. The figure was up from the 1.8% increase observed in the second quarter. Moreover, growth in imports was 2.4% in Q3, up from 0.2% in Q2. As a result, the net contribution of the external sector to overall growth improved from 0.2 percentage points in the second quarter to 0.8 percentage points in the third quarter.

The Federal Reserve cut its forecast and now expects economic growth to range between 1.7% and 1.9% this year (previous forecast: between 1.9% and 2.0%). It left next year’s forecast unchanged at a range of 1.9%—2.2%. FocusEconomics Consensus Forecast panelists expect GDP to expand 1.6% in 2016, which is unchanged from last month’s forecast. For 2017, the panel expects the economy to expand 2.1%, which is also unchanged from last month’s Consensus.