• Fri
  • Dec 26, 2014
  • Updated: 7:20am
BusinessEconomy

US GDP growth of 2.8 per cent masks weak consumer spending

PUBLISHED : Friday, 08 November, 2013, 11:56am
UPDATED : Friday, 08 November, 2013, 11:56am

The US economy grew at an annual rate of 2.8 per cent in the third quarter, the government said on Thursday in a report that revealed weakness in vital consumer spending.

The world’s largest economy accelerated from a 2.5 per cent pace in the second quarter, surprising analysts who had expected the Commerce Department’s first read on third-quarter gross domestic product would show only a 1.9 per cent expansion.

It was the strongest pace of GDP growth in a year. But analysts forecast a weaker fourth quarter this year, after a Washington budget battle forced a 16-day government shutdown last month that shaved an estimated US$24 billion from the economy.

“Unfortunately the details of this report are more likely to send chills up your spine than to warm your heart,” said Robert Brusca, chief economist at FAO Economics.

It was the department’s first estimate of GDP growth for the third quarter; but the number could change significantly in its two subsequent estimates.

The July-September pick-up was mainly due to a sharper decline in imports from the second quarter and accelerating rises in private inventory investment and state and local government spending.

Federal government spending, hit by “sequester” budget cuts that began in March, fell 1.7 per cent following a fall of 1.6 per cent in the second quarter.

Inflation heated up, led by price jumps in energy goods and services, but remained well below the 2 per cent target of the US Federal Reserve for price stability.

Unfortunately the details of this report are more likely to send chills up your spine than to warm your heart
Economist Robert Brusca

The price index rose 1.8 per cent in the third quarter, following a 0.2 per cent rise in the second. Excluding food and energy prices, the index increased 1.5 per cent, compared with a 0.8 per cent rise in the prior quarter.

Growth in consumer spending, which accounts for roughly two-thirds of US activity, slowed to 1.5 per cent from 1.8 per cent in the second quarter.

“The all-important service sector, the sector that dominates job growth, saw sales rise by 0.1 per cent at a seasonally adjusted annual rate. This is a pathetically weak showing,” Brusca said.

“You need to go back 17 quarters to find a weaker quarterly growth rate for consumer services spending.”

Personal income growth slowed to 3.8 per cent from 4.1 per cent in the second quarter, while the increase in real disposable income – adjusted for taxes and inflation – also fell, under pressure from rising consumer prices.

“The US economy had somewhat more pep in the previous quarter than expected amid solid gains in construction,” said Sal Guatieri of BMO Capital Markets.

However, he said, weakness in consumer spending and business investment, alongside the large gains in inventories and the government shutdown, “will weigh on growth in the current quarter”.

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