United States: Economy cools in Q3 on declining business investment
October 30, 2019
The economy slowed further in the third quarter, but fared better than expected thanks to resilient consumer spending and a weaker drag from the external sector. GDP growth moderated to 1.9% in the third quarter in seasonally-adjusted annualized terms (SAAR), according to an advance GDP estimate released by the Bureau of Economic Analysis. This was down from the 2.0% expansion registered in the second quarter, but overshot market expectations of 1.6% growth.
Weaker growth in the third quarter was largely broad-based. Private consumption expanded 2.9% in Q3, down from the robust 4.6% expansion in Q2, but solid nonetheless thanks to robust spending on durable goods, such as vehicles and appliances. Meanwhile, government expenditures also moderated notably (Q3: +2.0% SAAR; Q1: +4.8% SAAR)—in part due to the high base effect from pent-up federal spending in the prior quarter following the government shutdown at the outset of the year, while state and local spending also slowed. Business fixed investment, meanwhile, fell at a sharper rate in the third quarter (Q3: -3.0% SAAR; Q2: -1.0% SAAR), weighed on by declines in spending on structures and equipment, whereas investment in intellectual property products picked up in the quarter. On a brighter note, residential investment rebounded robustly in Q3, after six consecutive contractions, likely boosted by lower mortgage rates and a sign of a nascent recovery in the housing market. Moreover, private inventories had a negligible effect on growth in Q3, after a drawdown dragged on growth in Q2.
Turning to the external sector, exports of goods and services rebounded in Q3 after dropping sharply in Q2 (Q3: +0.7% SAAR; Q2: -5.7% SAAR), while growth in imports of goods and services accelerated to 1.2% in the quarter, following a flat reading in Q2. Consequently, net trade detracted a more modest 0.1 percentage points from growth in Q3 (Q2: -0.7 percentage points).
By and large, the economy is projected to cool further in Q4 and into 2020 as the negative effects of the longstanding U.S.-China trade dispute and the global growth slowdown continue to dampen fixed investment, which will eventually feed through to the labor market and, thus, consumer spending.
Commenting on the outlook, Daniel Vernazza, chief international economist at UniCredit, noted:
“The Fed is likely to interpret the 3Q19 GDP report as evidence that the economy is in a “good place” […] In our view, however, we think this time is different. The squeeze in corporate profit margins, high corporate debt, and subdued business confidence (the latter resulting from trade tensions) will lead to a more pronounced slowdown in hiring and rising unemployment, which will force the US consumer to rein in spending.”