Published: Sun, October 28, 2018
Markets | By Noel Gibbs

U.S. economic growth slows slightly in third-quarter; outlook less upbeat

U.S. economic growth slows slightly in third-quarter; outlook less upbeat

"We expect stronger growth in the first half of 2019 to give way to a gradual softening in the second half of the year as government spending, corporate profits and disposable income begins to decelerate as the benefits of the fiscal stimulus measures fade", said Sam Bullard, a senior economist at Wells Fargo Securities in Charlotte, North Carolina. "Economists polled by Dow Jones expected the economy to expand by a 3.4 percent annual rate", adds the article.

"The U.S. economy grew at a faster-than-expected rate in the third quarter as inflation was kept in check and consumer spending surged, according to data released by the Commerce Department on Friday", writes CNBC. That was slightly higher than the 3.4% reading economists surveyed by The Wall Street Journal had expected and followed strong growth in the second quarter. However, there were some red flags to the expansion of the economy that is now in a ninth straight year, which is the second longest ever recorded.

The $1.5 trillion tax cut passed by Congress late previous year was one pillar of President Trump's plan to boost economic growth to the above-3% rate that marked the robust expansions of the 20th century. Excluding the effects of trade and inventories, GDP grew at a 3.1 per cent rate in the third quarter compared to a 4.0 per cent pace in April-June.

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This latest figure, however, still does reflect the anticipated negative impact from the tariffs President Donald Trump's administration has imposed on the majority of Washington's trading partners, including China and the EU. Farmers front-loaded shipments to China before the tariffs took effect in early July, boosting second-quarter growth. However, since that time exports of soybeans have dropped each month which increased the trade deficit.

However, the drag from trade was probably offset by faster inventory accumulation by businesses stockpiling before US import duties, on mostly in Chinese goods, came into effect.

Adding to the growth burst, federal government expenditures were up at a 3.3% annual rate in the third quarter, with defense spending rising at an annual rate of 4.6%. Growth in consumer spending, which accounts for more than two-thirds of United States economic activity, increased at a 4.0 per cent rate in the third quarter.

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"For GDP to rise above estimates of around 2.5 percent growth next year, businesses are going to have to kick in with higher wages as the workforce tightens, and with more investment", Frick said.

Imports, which are a subtraction in the calculation of GDP, increased. The rebound in imports also reflected a rush by businesses to stockpile before USA import duties, mostly on Chinese goods, came into effect late in the third quarter. 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. "Plus the lowest unemployment rate in 49 years!"

Nonresidential fixed investment - which includes spending on equipment, structures and intellectual property - contributed just 0.12 percentage point to growth, after 1.15 point in the second quarter. Residential fixed investment fell at a 4.0% rate in the third quarter. Businesses are struggling to find workers and the import tariffs are increasing manufacturing costs for companies, such as Caterpillar, 3M and Ford Motor.

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GDP growth last quarter benefited from a rebuilding of inventories, which dragged down expansion in the prior period amid tariff-related supply chain disruptions and steady demand.

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