United States: Q3 GDP growth still robust on strong consumer and public spending, but weaknesses start to show
An advance GDP estimate showed the U.S. economy continued to grow at a solid clip in the third quarter, buttressed by strong consumer spending, higher governmental outlays and a rebuilding of inventories that had been largely depleted in the second quarter. GDP growth in the third quarter reached 3.5% in seasonally-adjusted annualized (SAAR) terms, down from the four-year high of 4.2% recorded in Q2, but above market analysts’ expectations of 3.3%. Despite the robust headline print, a feeble performance from the trade sector, along with falling residential and business investment, are calling into question the sustainability of the current economic momentum, amid rising interest rates and an escalating trade war with China. In year-on-year terms, the economy expanded 3.0% in Q3, inching up from 2.9% in Q2.
Private spending continued to drive growth in the third quarter (Q3: +4.0% SAAR; Q2: +3.8% SAAR) as the unemployment rate reached a near 50-year low in September, while consumer confidence neared its all-time high in the same month. Spending on goods again drove the increase, with durable goods purchases remaining strong but softening from Q2—likely due to weaker motor vehicles sales, as reflected in the quarter’s retail sales data. Service spending also marginally accelerated from Q2’s over three-year high. Looking at public expenditures, spending growth accelerated from to 3.3% in Q3 (Q2: +2.5% SAAR), which was the strongest print since Q1 2016. Federal outlays moderated somewhat, as defense spending softened—although remained robust—while non-defense expenditures accelerated. This was, however, more than offset by markedly higher state and local spending.
Worryingly, fixed investment logged a rather weak showing in Q3, contracting 0.3% after a 6.4% expansion in Q2. Residential investment contracted 4.0% SAAR, the fifth decline in the last six quarters and a sharp deterioration from Q2’s 1.3% contraction. This underlines that the housing sector continues to be a weak point of the economy. Meanwhile, non-residential fixed investment slowed sharply from 8.7% growth in Q2 (SAAR) to just 0.8% in Q3. This was due to a 7.9% contraction in spending on structures (Q2: +14.5% SAAR), while investment in equipment and intellectual property both slowed markedly as well. The sharp downswing signals that the boost from corporate tax cuts enacted in December 2017 might be fading faster than previously expected, or that trade-related uncertainty is starting to bite. On the plus side, a build-up in inventories added just over a full two points to headline GDP growth in Q3.
Lastly, the external sector performed very poorly in Q3. Exports fell for the first time in almost two years (Q3: -3.5% SAAR; Q2: +9.3% SAAR) due to a sharp contraction in goods exports, while imports rebounded from a 0.6% contraction in Q2 to 9.1% growth in Q3. This was due to a surge in goods imports, in part linked to the replenishment of inventories. Looking ahead, the trade sector is likely to remain weak given rising trade tensions—which will likely also weigh on business investment. Private and public spending should nonetheless remain strong in coming quarters but will face increasing headwinds from tighter monetary conditions and higher tariffs. Notably, the tariff rate on Chinese imports is set to increase from 10% to 25% on 1 January 2019.