United States economy grew at 3.5% in Q3

Andrew Cummings
October 29, 2018

The U.S. economy grew faster than forecasted in the third quarter with GDP expanding at an annualized rate of 3.5%, faster than expected by economists.

This year's third-quarter figure was fueled by strong consumer spending, but newly enacted trade tariffs between the US and China acted as a drag on the figures.

A 3.5% growth in the 3rd quarter is the second strongest in the past four years, after the 2nd quarter of 2018. "It appears most business leaders have become somewhat cautious about the future and are holding off committing to major investment plans", said Joel Naroff, chief economist at Naroff Economic Advisors in Holland, Pennsylvania.

There's mounting anecdotal evidence that President Donald Trump's trade war is causing trouble for the USA economy and businesses.

But some economists worry that the recent stock market declines could be a warning signal of a coming slowdown.

Fed officials have recently talked about "optimism and acceleration in capital spending and could it lift the supply side", but the slowing in business investment "is inconsistent with a sizable improvement in spending", said Michael Gapen, chief USA economist at Barclays Plc and a former official at the central bank.

Mick Mulvaney, head of the president's budget office, said in a CNBC interview that while business investment was flat this quarter, it followed several quarters when investment has been "fantastic". So far, much of the money from the tax cuts is not going directly to investments, but instead to stock buybacks, something Democrats predicted in their opposition of the bill.

Ian Shepherson, an economist at Pantheon Macroeconomics, said of Friday's report, "In one line: Strong GDP growth hides soft capex and massive trade deterioration".

‏Sen. Roger Wicker (R-Miss.) echoed the sentiment, while adding that the report is the latest indicator that Republican policies like tax and regulatory cuts have reenergized the economy.

"[Trump's] America First agenda is creating opportunities, increasing prosperity & GROWING the economy", Vice President Mike Pence said in a tweet.

Wall Street closed sharply lower but markets were less moved by the GDP data than by disappointing earnings.

The central bank has raised rates three times this year and signalled it will raise rates one more time this year and expect to raise rates three times in 2019. "Plus the lowest unemployment rate in 49 years!"

The economy did grow slower than the 4.2% pace of growth seen during the second quarter, but still indicates that economic growth remains strong after tax cuts passed by the President Donald Trump late previous year.

The second GDP estimate for the third quarter (July-September) is scheduled to be released on November 28. That was up from a rate of 3.8% recorded in the previous quarter. Trump's trade war with China is set to escalate in January, when tariffs on about half of all imports from China jump from 10% to 25%.

Another big swing factor in the third quarter was business restocking of their shelves.

Consumer spending grew at an annual rate of 4% in the quarter, boosted by higher disposable incomes.

The struggling housing market was also a drag, falling by four per cent from the prior quarter in its sharpest fall in more than a year. Nonresidential fixed investment-reflecting spending on commercial construction, equipment and intellectual property products such as software-rose only 0.8% in the third quarter after rising at a 8.7% rate in the second quarter and 11.5% in the first.

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