US economy expands in Q3 to put tepid first half behind it

PUBLISHED : Saturday, 29 October, 2016, 1:12am
UPDATED : Saturday, 29 October, 2016, 1:12am

US economic growth picked up in the third quarter after an uninspiring first half of the year as a build in inventories and a soybean-related jump in exports helped cushion softer household spending.

The 2.9 per cent annualized increase in gross domestic product, the value of all goods and services produced, was the biggest in two years and followed a 1.4 per cent gain the prior quarter, Commerce Department data showed Friday. The median forecast in a Bloomberg survey called for 2.6 per cent growth. Consumer spending, the biggest part of the economy, rose a less-than-projected 2.1 per cent.

The data are in sync with the views of Federal Reserve policy makers that the economy is making slow and steady progress. At the same time, solid employment and steady income gains are a sturdy base for households to continue in the role as the economy’s main driver of growth, a contrast with the drag from business investment.

“The economy is good but not great,” said Stephen Stanley, chief economist at Amherst Pierpont Securities LLC in New York. “The economy is going to continue to rise and fall with the consumer, and the best news there is that the underlying fundamentals are strong.”

Consumer purchases grew at about half the pace as in the previous three-month period and corporate investment in equipment declined for a fourth straight quarter, the longest such stretch of the current expansion.

Inventories rebounded in the third quarter after shrinking in the prior three months, contributing to growth for the first time since early 2015. Exports accelerated, adding the most to GDP since the final three months of 2013.

To get a better sense of underlying domestic demand, economists look at final sales to domestic purchasers, which strip out inventories and exports. Such sales grew an annualized 1.4 percent last quarter after a 2.4 per cent increase from April through June.

Central bank officials can point to evidence that growth is healthy enough to warrant raising interest rates, just not necessarily at the Fed’s gathering next week. Democrats and Hillary Clinton can claim the economy is improving, while Republicans and Donald Trump can just as plausibly say progress is tepid.

Economists’ GDP forecasts ranged from 1.3 per cent to 3.6 per cent. The estimate is the first of three for the quarter, with the other releases scheduled for November and December when more information becomes available.

Household purchases, which account for about 70 per cent of the economy, grew at a slower pace after the prior quarter’s 4.3 per cent jump that was the biggest since late 2014. The median forecast in the Bloomberg survey was also 2.6 per cent. Purchases added 1.47 percentage points to growth.

After-tax incomes adjusted for inflation climbed at a 2.2 per cent annual rate, after a 2.1 per cent gain in the prior three months. The saving rate held at 5.7 per cent.

Net exports added 0.83 percentage points to GDP growth. Trade and inventories are two of the most volatile components in GDP calculations.

The Commerce Department said that the acceleration in overseas shipments was mostly attributable to an increase in exports of soybeans, indicating the pickup was probably temporary.

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The GDP report also showed price pressures remain limited. A measure of inflation, which is tied to consumer spending and strips out food and energy costs, climbed at a 1.7 per cent annualized pace.

The GDP report comes days before the Fed’s rate-setting committee meets on November 1-2 and Americans go to the polls on November 8 to choose a new president. Investors see a slim chance for a rate move when policy makers gather next week, and a higher probability for December.