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Second estimate leaves Q3 headline growth unchanged; points to softer consumption, higher investment and inventories

A second estimate of third quarter GDP released by the Bureau of Economic Analysis (BEA) left headline growth unrevised at a solid 3.5% seasonally-adjusted annualized rate (SAAR). The print met market analysts’ expectations and was down from the four-year high of 4.2% (SAAR) recorded in Q2. Despite leaving the headline unchanged, the second release revised GDP components significantly—showing weaker private and public spending, lower net exports, higher investment, and a larger inventory build-up compared to the first estimate. In year-on-year terms, the second estimate also showed GDP growth unchanged at 3.0% (Q2: +2.9% year-on-year).

Though private consumption continued to drive growth in the quarter, the second estimate showed it slightly slowing from Q2’s 3.8% (SAAR) growth to 3.6% in Q3 (previously reported: +4.0% SAAR). This was largely due to lower growth in durable goods purchases than previously estimated, in part reflecting weak motor vehicle sales in the quarter. Government consumption growth was also revised down to 2.6% (previously reported: +3.3% SAAR; Q2: +2.5% SAAR) on the back of lower growth in state and local expenditures, though federal defense spending was revised slightly upwards.

On a more positive note, fixed investment growth logged a 1.4% growth print (SAAR) instead of the first estimate’s 0.3% contraction. Although it still slowed significantly from Q2’s 6.4% figure, the upward revision was due to a softer contraction of residential investment (-2.6% SAAR; previously reported: -4.0% SAAR) and stronger non-residential investment growth (+2.5% SAAR; previously reported: +0.8% SAAR). Meanwhile, the build-up of inventories in Q3 was slightly larger than previously thought, contributing 2.3 percentage points to the headline GDP reading (previously reported: +2.1 percentage points). This was likely the consequence of replenishing stocks that had been depleted in the previous quarter.

On the other hand, the external sector’s performance worsened from the first estimate’s already weak print. Indeed, export growth was revised down from -3.5% SAAR to -4.4% (Q2: +9.3% SAAR) on the back of a sharper contraction in goods exports, while import growth was left broadly unchanged at 9.2% SAAR (previous estimate: +9.1% SAAR, Q2: -0.6% SAAR).

Leslie Preston, senior economist at TD Economics, noted that:

“Looking ahead, monthly indicators point to a slower, but still solid, pace of growth in the fourth quarter (between 2 - 2 ½%). Slower growth will largely reflect a moderation in consumer spending, as the boost from tax cuts that lifted spending through the middle of the year fades. On the plus side, healthy growth in corporate profits suggests businesses have the capacity to keep investing, if they remain confident about future demand. With various measures of business confidence starting to show strain from the ongoing ratcheting up of import tariffs and retaliation on U.S. exports, the question is whether worries will translate into revised capital expenditure plans.”

United States GDP Forecast

The Federal Reserve expects economic growth of 2.5% in 2019 and 2.0% in 2020. FocusEconomics Consensus Forecast panelists expect GDP growth of 2.5% in 2019, which is unchanged from last month’s forecast. For 2020, the panel projects the economy to grow 1.7%.