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United States

US economy grows at its fastest pace in three years

PUBLISHED : Thursday, 30 November, 2017, 3:18am
UPDATED : Thursday, 30 November, 2017, 3:18am

The US economy grew faster than initially thought in the third quarter, notching its quickest pace in three years, buoyed by robust business spending on equipment and an accumulation of inventories.

Gross domestic product expanded at a 3.3 per cent annual rate last quarter, which was also boosted by a rebound in government investment, the Commerce Department said in its second GDP estimate on Wednesday. That was the fastest pace since the third quarter of 2014 and a pickup from the second quarter’s 3.1 per cent rate.

The economy was previously reported to have grown at a 3.0 per cent pace in the July-September period. It was the first time since 2014 that the economy experienced growth of 3 per cent or more for two straight quarters.

The growth pace, however, likely exaggerates the health of the economy as inventories, goods yet to be sold, accounted for nearly a quarter of GDP growth. Excluding inventory investment, the economy grew at a 2.5 per cent rate.

When measured from the income side, output also expanded at a 2.5 per cent rate. Economists had expected that third-quarter GDP growth would be raised to a 3.2 per cent rate. The brisk growth pace strengthens the case for the Federal Reserve to raise interest rates next month. The US central bank has increased borrowing costs twice this year.

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Fed Chair Janet Yellen told lawmakers on Wednesday “the economic expansion is increasingly broad based across sectors,” and that she expected that “the economy will continue to expand.”

The economic recovery since the 2007-2009 recession is now in its eighth year and showing little signs of fatigue. The economy is being powered by a tightening labour market, which has largely maintained a strong performance that started during former President Barack Obama’s first term.

Economists see a modest boost to growth from efforts by President Donald Trump and his fellow Republicans in Congress to push through a broad package of tax cuts, including slashing the corporate income tax rate to 20 per cent from 35 per cent.

Trump wants lower taxes to lift annual GDP growth to 3 per cent on a sustained basis. The fiscal stimulus would, however, come when the economy is at full employment.

“Corporate and personal income tax cuts will have minimal impact on growth over the longer run,” said Gus Faucher, chief economist at PNC Financial in Pittsburgh. “In 2019 and beyond growth will settle in to its long-run average of 2 per cent to 2.25 per cent.”

The government said after-tax corporate profits surged at a 5.8 per cent rate last quarter after rising at only a 0.1 per cent pace in the second quarter. Undistributed profits jumped at a 13.9 per cent rate after declining for two straight quarters, suggesting that companies were anticipating deep tax cuts.

Businesses accumulated inventories at a US$39.0 billion pace in the third quarter, instead of the previously reported US$35.8 billion rate.

As a result, inventory investment contributed 0.8 percentage point to third-quarter GDP growth, up from the previously reported 0.73 percentage point.

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That suggests inventories could be a drag on growth in the fourth quarter. Data on Tuesday showed a drop in wholesale and retail inventories in October, leading economists to slash their fourth-quarter GDP growth estimates by as much as five-tenths of a percentage point to as low as a 2.3 per cent rate.

Growth in consumer spending, which accounts for more than two-thirds of the US economy, was revised down to a 2.3 per cent rate in the third quarter from the previously reported 2.4 per cent pace. Consumer spending increased at a robust 3.3 per cent rate in the second quarter.

The deceleration in consumer spending likely reflects the impact of Hurricanes Harvey and Irma, which struck Texas and Florida during the third quarter. Spending also is being constrained by sluggish wage growth, which is forcing households to dip into their savings to fund purchases.

The government cut its estimate for the increase in second-quarter wages and salaries by US$26.5 billion. The saving rate decreased to 3.3 per cent in the third quarter from 3.7 per cent in the April-June period.

Economists said savings cannot drive consumer spending indefinitely. But they also believe that income growth is being understated, pointing to a 4.1 per cent unemployment rate as well as strong business investment.

Growth in business investment in equipment was raised to a 10.4 per cent pace, the fastest growth pace in three years, from the previously reported 8.6 per cent rate. Businesses also increased spending on software.

But investment in non-residential structures fell at a 6.8 per cent pace in the third quarter, the biggest drop since the fourth quarter of 2015, instead of the previously estimated 5.2 per cent rate. That is largely because of a slowdown in spending on mining exploration, wells and shafts.

Growth in government spending was raised to a 0.4 per cent rate. Government outlays were previously reported to have declined at a 0.1 per cent pace in the third quarter. Government spending had contracted for two consecutive quarters.