WASHINGTON: The US economy slowed less than expected in the third quarter as a tariff-related drop in soybean exports was partially offset by the strongest consumer spending in nearly four years, keeping it on track to hit the Trump administration’s 3 per cent growth target this year.
Gross domestic product increased at a 3.5 per cent annualized rate also supported by a surge in inventory investment and solid government spending, the Commerce Department said on Friday in its first estimate of third-quarter GDP growth. While that was a slowdown from a 4.2 per cent pace in the second quarter, it still exceeded the economy’s growth potential, which economists put at 2 per cent.
Compared to the third quarter of 2017, the economy grew 3 per cent, the best performance since the second quarter of 2015. But business spending stalled and residential investment declined for a third straight quarter, potential red flags to the economic expansion that is now in its ninth year and the second longest on record. Economists had forecast GDP expanding at a 3.3 per cent pace in the third quarter.
The economy is underpinned by a $1.5 trillion tax cut and increased government spending. The fiscal stimulus is part of measures adopted by President Donald Trump’s administration to boost annual growth to 3 per cent on a sustainable basis.
Yet the government is also locked in a bitter trade war with China as well as trade disputes with other trade partners and the last quarter’s slowdown mostly reflected the impact of Beijing’s retaliatory tariffs on US exports, including soybeans.
Farmers front-loaded shipments to China before the tariffs took effect in early July, boosting second-quarter growth. Since then, soybean exports have declined every month, increasing the trade deficit. There were also decreases in exports of petroleum and non-automative capital goods. Strong domestic demand, however, sucked in imports of consumer goods and motor vehicles.
The widening trade gap chopped off 1.78 percentage points from GDP growth in the third quarter. That was the most since the second quarter of 1985 and reversed the 1.22 percentage point contribution in the April-June period.
Some of the rebound in imports reflected a rush by businesses to stockpile before US import duties, mostly on Chinese goods, came into effect late in the quarter. Imports are a drag on GDP growth. But some of the imports likely ended up in warehouses, adding to the stockpile of inventory, which adds to GDP.
Inventories increased at a $76.3 billion rate after declining at a $36.8 billion pace in the second quarter. As a result, inventory investment added 2.07 percentage points to GDP growth, the biggest contribution since the first quarter of 2015, after slicing off 1.1 percentage points from output in the second quarter.
Excluding the effects of trade and inventories, GDP grew at a 3.1 per cent rate in the third quarter compared to a 4 per cent pace in April-June.
The dollar rose to a session high against a basket of currencies on the data while US Treasury prices fell.
Solid third-quarter growth is expected to keep the Federal Reserve on course to raise interest rates again in December, despite a recent tightening in financial market conditions brought about by a stock market sell-off and a rise in US Treasury yields.
The Fed raised rates in September for the third time this year and removed a reference to monetary policy remaining “accommodative” from its policy statement.
