The U.S. Department of Commerce released its quarterly GDP report on Friday last week. Driven by strong consumer and government spending, the U.S. economic engine continued to power ahead. However, the outlook from weaker business investment has put analysts on a caution which could signal a potential slowdown in the economy in the coming quarters.
For the moment, however, investors cheered the positive GDP growth story. The gross domestic product, a measure of the value of all goods and services that are produced in the United States was seen advancing at a pace of 3.5% on a seasonally and inflation-adjusted basis. This was a slower pace of increase compared to the second quarter where the U.S. Advance GDP was 4.2%.
Economists forecast that the GDP for the third quarter, ending September 2018 would rise just 3.3%. However, the actual data beat estimates.
Consumer spending which accounts for more than two-thirds of the economic output was seen rising at a healthy pace of 4.0% annually in the third quarter. This was the most robust growth rate in consumer spending in over four years. Spurred by low unemployment and rising wages and steady job creation, consumers spent more. This was also in part to the tax cuts in December 2017.
Contributing to the growth, spending at the federal level was also up. Government spending expenditure rose 3.3% on an annualized basis in the quarter ending September 2018. Defense spending was seen rising 4.6% while state and local government spending rose 3.2% on an annualized basis.
Despite the positive data, analysts warn that growth could slow down in the coming quarters.
This is because the initial boost given by the stimulus program via tax cuts are expected to fade. Rising inflation and monetary policy tightening are expected to keep consumer spending in check. On an industrial level, the uncertainty in the global markets about the trade is also likely to slow down.
As the Fed continues to hike interest rates, the impact of higher borrowing costs is expected to affect the housing and automobile markets. Data for the third quarter already showed that spending on motor vehicles and parts added just 0.9 percentage points to the total GDP output.
The U.S. housing sector which is already seen coming under the impact of higher rates posted a drag in the third quarter. Fixed investment in residential fell 4.0% during the reported quarter. The data is said to reflect the short-term higher interest rates and low inventory. Tax code changes which cut the decade-old perks were also seen affecting this sector.
Business investment was also seen to be sluggish. The non-residential investment which reflects spending on commercial construction, equipment, and other sorts were seen rising just 0.8% during the third quarter. This comes after non-residential spending rose to 8.7% in the second quarter and a whopping 11.5% in the first quarter.
Business investment in the third quarter was the weakest since the fourth quarter of 2016. Spending fell at a rate of 7.9% in the reported quarter.
Private inventories meanwhile added 2.07 percentage points to the quarterly growth rate. This was a reversal from the second quarter when companies were seen cutting back on spending to get ahead of the retaliatory tariffs on commodities and goods.
Exports from the United States fell for the third quarter in a row. Total exports declined to an annual rate of 3.5% reflecting the headwinds from international trade and the uncertainty. Meanwhile, despite the tariffs, imports to the United States rose 8.1%.
The data showed that domestic demand was rising at a faster pace than the supply indicating the deficit in trade.
However, the U.S. Department of Commerce noted that it was difficult to estimate the impact to the GDP from the Hurricane Florence which hit the North Carolina coastal area in mid-September.