United States: Solid Q3 GDP growth paves the way for third interest rate hike in December
October 27, 2017
The economy made significant progress in the third quarter in spite of the effects of the two hurricanes that made landfall in August and September. GDP expanded at a seasonally-adjusted annualized rate (SAAR) of 3.0%, according to a first estimate released by the Bureau of Economic Analysis (BEA) on 27 October, well above market expectations of a 2.6% increase. The reading came in marginally below the 3.1% expansion recorded in the second quarter and was underpinned by robust household spending and a solid external sector. A year-on-year comparison showed that GDP increased 2.3% in Q3, which was slightly above the previous quarter’s 2.2% expansion.
The domestic sector pulled its weight in the third quarter on the back of healthy private consumption growth, resilient non-residential investment and increased inventories. U.S. households continued to benefit from a robust pace of job creation and low unemployment, with private consumption expanding at a SAAR of 2.4% in Q3, ahead of market expectations of a 2.1% increase but below Q2’s 3.3% increase. Durable spending growth was particularly strong at 8.3%, which partially reflected hurricane replacement demand for vehicles.
Non-residential investment was also relatively strong at a 3.9% increase, with equipment investment recording a solid 8.6% pick-up. However, investment in non-residential structures fell 5.2%, partially the result of disruptions related to Hurricanes Harvey and Irma. In line with this, residential investment was down 6.0% in Q3. Meanwhile, government consumption remained in the doldrums with a 0.1% decrease in Q3 (Q2: -0.2% SAAR). Inventory investment contributed significantly to growth, however, adding 0.7 percentage points to the headline reading.
The external sector also performed well, doubling its contribution to growth from the previous quarter. On the heels of improved global demand and the depreciation of the U.S. dollar, exports rose a notable 2.3% in SAAR terms in Q3, which nonetheless was below the 3.5% increase recorded in the previous quarter. Imports, however, declined 0.8% in Q3, contrasting a 1.5% increase recorded in Q2. As a result, the external sector’s net contribution to growth came in at a solid 0.4 percentage points in Q3, which followed the 0.2 percentage-point contribution logged in Q2.
The report spells good news for the U.S. economy, which has proven resilient to the unfavorable weather conditions in the third quarter. With business and consumer sentiment buoyant, and reconstruction efforts expected to shore up economic activity in Q4, broad-based economic growth and a tight labor market could see the Federal Reserve delivering a third interest rate hike before year-end, as widely expected by FocusEconomics panelists.
Author: David Ampudia, Economist