US consumers put economy on moderate growth path in third quarter

A Walmart employee stocks the toy section of Walmart on Black Friday, a day that kicks off the holiday shopping season, in King of Prussia, Pennsylvania, US – Reuters

WASHINGTON (Reuters): US economic growth nudged up in the third quarter and the economy appears to have maintained the moderate pace of expansion as the year ended, supported by a strong labour market. 

Other data on Friday showed consumer spending increased solidly in November, adding to a string of upbeat data that have helped to quell recession fears which gripped financial markets in the summer. 

The longest expansion in history, now in its 11th year, remains on track thanks to the Federal Reserve cutting interest rates three times this year. The US central bank last week kept rates steady and signalled borrowing costs could remain unchanged at least through 2020. 

Though growth has been relatively strong, economists did not expect the economy to achieve the Trump administration’s 3.0% target this year. Still, the resilient economy could offer some respite for President Donald Trump who was impeached on charges of abusing his office on Wednesday by the Democratic-led House of Representatives. 

“The data will comfort the Fed that the economy is in ‘a good place’ and monetary policy is ‘appropriate’,” said Oxford Economics, New York, Chief US Economist Gregory Daco. 

Gross domestic product increased at a 2.1% annualised rate, the Commerce Department said in its third estimate of third-quarter GDP. That was unrevised from November’s estimate. The economy grew at a 2% pace in the April-June period. 

Despite the unrevised estimate, which was in line with economists’ expectations, consumer spending was stronger than previously reported in the third quarter. 

There were also upgrades to business spending on non-residential structures such as power infrastructure, which limited the drop in overall business investment. That offset downward revisions to investment in homebuilding and inventory accumulation. Imports, which are a drag to GDP growth, were higher than previously estimated. 

Growth estimates for the fourth quarter range from as low as a 1.5% rate to as high as a 2.3% pace. Growth has slowed from the 3.1% rate notched in the first three months of the year in part because of the 17-month trade war between the United States and China and the fading stimulus from last year’s $1.5 trillion tax cut package. 

When measured from the income side, the economy grew at a 2.1% rate in the last quarter, rather than the 2.4% pace estimated in November. Gross domestic income (GDI) increased at a rate of 0.9% in the second quarter. 

The revision to the income side of the growth ledger reflected a downgrade to corporate profits.

After-tax profits without inventory valuation and capital consumption adjustment, which corresponds to S&P 500 profits, were revised down to show them declining $23.1 billion, or at a rate of 1.2%. Profits were previously reported to have decreased $11.3 billion, or at a rate of 0.6% in the third quarter.

They were in part held down by legal settlements with Facebook and Google. Profits increased at a 3.3% rate in the second quarter. The average of GDP and GDI, also referred to as gross domestic output and considered a better measure of economic activity, also increased at a 2.1% rate in the July-September period.

The data boosted the dollar against a basket of currencies, while US Treasury prices fell. Stocks on Wall Street were treading higher, pushing key indexes to new record highs.

Moderate growth path

The economy’s moderate growth speed appears to have persisted in the fourth quarter. In a second report on Friday, the Commerce Department said consumer spending, which accounts for more than two-thirds of US economic activity, rose 0.4% last month as households stepped up purchases of motor vehicles and spent more on healthcare. Consumption increased 0.3% in October.

Consumer spending is being supported by the lowest unemployment rate in nearly half a century. But inflation stayed tame last month and could remain so for a while. The University of Michigan’s survey of consumers showed households’ one-year inflation expectations fell in December to 2.3%, the lowest in three years, from 2.5% in November.

“If this month’s drop in inflation expectations is sustained or intensifies, it would be concerning to the Fed, which is trying to lift inflation, and would suggest easier monetary policy than would prevail otherwise,” said Moody’s Analytics in West Chester, Pennsylvania, Senior Economist Scott Hoyt.

Despite the economy improving prospects, risks remain. Boeing’s decision this week to suspend production of its best-selling 737 MAX jetliner in January after two fatal crashes of the now-grounded aircraft means the fallout is likely to drag into 2020. That could pressure the fragile manufacturing sector, which was starting to stabilise as the US-China trade tensions ebb.

Economists estimate that Boeing’s biggest assembly-line halt in more than 20 years, which is expected to wreak havoc on supply chains, could cut first-quarter 2020 gross domestic product growth by at least half a percentage point.

In the GDP report, growth in consumer spending was raised to a 3.2% rate in the third quarter from the previously reported 2.9% pace. Inventories rose at a $69.4 billion pace instead of the $79.8 billion rate reported last month.

Business investment dropped at a 2.3% rate in the third quarter, rather than contracting at a 2.7% pace as previously reported. Spending on non-residential structures such as mining exploration, shafts and wells declined at a 9.9% rate instead of the previously reported 12% pace.