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U.S. Ends Third Quarter With a Bang. GDP Revised Higher

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Latest data from the U.S. Commerce department showed that the U.S. economy advanced at a faster pace than previously estimated during the three months ending September, bringing the yearly growth rate in line with the sluggish expansion.

The final revision to the U.S. gross domestic product showed that the economy expanded at a pace of 3.5% on a seasonally adjusted basis in the third quarter and 1.7% on an annual basis. This was a significant revision from the second estimates which showed a 3.2% quarterly growth rate. The final revision also pushed the quarterly pace of growth to the highest level in two years. U.S. GDP hit a high of 5% quarterly growth in Q3 2014.

U.S. Annual GDP growth rate at 1.7%, 2016
U.S. Annual GDP growth rate at 1.7%, 2016

The data beat economists’ expectations who penciled in a revision of 3.3% for the July – September period. Previously, the quarterly GDP growth rate registered a 1.4% increase in the second quarter while the first quarter was the slowest, recording a 0.8% increase in GDP. The third quarter data records the month before the U.S. presidential elections.

Consumer spending in the services sector contributed to the gains in the GDP which was also supported by better than expected investment in buildings and intellectual property.

Despite the bullish print, many analysts are still doubtful if the U.S. can maintain the pace of gains seen in the third quarter, leading many to call the third quarter GDP an outlier. At the time of writing, various GDP tracking models show the fourth quarter growth rate in the range of 2.5% – 1.8% (Atlanta Fed GDPNow and the NY Fed Nowcast GDP models).

Atlanta Fed GDPNow Model forecasts 2.8% quarterly GDP growth in Q4 2016
Atlanta Fed GDPNow Model forecasts 2.8% quarterly GDP growth in Q4 2016

A separate poll by Wall Street Journal puts the economic growth at 1.9%. The commerce department will be releasing the first official estimates for the fourth quarter on January 27, which comes just a few days ahead of the Jan/Fed FOMC meeting due on February 1, 2017.

Although the GDP data looked positive in the short-term, in the long term, data showed that the U.S. economy has been rising at a rather slow pace of 2% since the end of the great recession. The pace of growth is also the slowest rate of recovery since 1949.

The revised data showed that consumer spending rose at an annual rate of 3% during the period which was higher than the previous estimates of 2.8% growth. However, compared to the second quarter’s 4.3% growth it was still weaker. Business spending, fixed nonresidential investment also increased at a pace of 1.4% during the period, higher than the 0.1% growth previously estimated. Residential investment was weaker, falling 4.1% during the reported period, hinting at a slowdown in homebuilding which has been a major support in driving GDP growth, alongside a boost from international trade and private inventory.

The revised GDP figures showed a modest reduction in the state and local government spending which was lower than previously estimated. Federal spending on defense and nondefense increased during the third quarter.

In a separate report, consumer spending and income data showed that household spending slowed during November while incomes stayed flat compared to a month ago. Personal consumption was seen rising 0.2% in November while personal income was unchanged during the same period. This was below forecasts of a 0.3% increase on both spending and personal income. Data for October was also revised to show a 0.4% increase while personal income was revised to 0.5% from 0.6%.

The slowdown in November comes after consumer spending which accounts for nearly two-third of the total output in the U.S. posted an impressive 3.5% gain on a quarterly basis, which was the highest in two years.

The U.S. dollar was mixed on the news release briefly falling to a three-day low of 102.64 before recovering on an intraday basis.

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