Consumer spending is the driver that it should be, leading a solid third-quarter GDP report that, however, does raise some fundamental questions about the outlook for the economy. GDP came in at a 3.5 percent annualized rate in the quarter which is 2 tenths above Econoday’s consensus. Consumer spending, with strength centered in the key durable-goods subcomponent, easily beat high expectations, at a 4.0 percent rate that outdoes the second quarter’s very strong 3.8 percent showing.
Business investment wasn’t the major star as it has been in prior quarters but still was in the plus column at 0.8 percent growth. Yet the slowing, following growth rates of 8.7 and 11.5 percent in the second and first quarters, may hint at a quick fade for the stimulative effects of this year’s corporate tax cut. Residential investment extended its dismal run, falling at a 4.0 percent rate for the fifth contraction of the last six quarters which underscores housing as a problem sector.
Another problem that may be unfolding for the economy is trade. The deficit in net exports widened by a very steep $99.0 billion in the quarter and, by itself, pulled the quarter’s GDP down by 1.8 percentage points. Whatever tariff effects there are in the quarter, whether on metals or agriculture, they didn’t hold down imports which surged at a 9.1 percent growth rate. Also negative for GDP is exports which posted their first contraction in 2-1/2 years at minus 3.5 percent.
Coming to the rescue and outmatching the trade effect, however, is a constructive $76.3 billion build in inventories which, when measured against the prior quarter, contributed 2.1 percentage points to GDP. Inventories were a major negative in the second quarter, having been drawn down sharply and positioning the third-quarter for what proved to be a major build.
Government purchases round out the components, rising at a 3.3 percent clip and adding 0.6 percentage points to the quarter for one of the strongest showings of the expansion. But stimulus from government purchases is no surprise given the government’s massive $4.1 trillion in annual outlays.
Another impact the government has on the economy is monetary policy where interest rates, given the perceived need at the Federal Reserve to cool demand, are going up to fight the risk of inflation. Yet inflation didn’t show much life at all in the third-quarter as the GDP price index came in at only 1.7 percent. This misses the consensus by 3 tenths and is the most subdued result since the second-quarter last year.
But the real surprise in the report is the strength of consumer spending where the outlook, given the enormous level of demand for labor, looks very positive. Not positive, however, is the weakness in housing and also trade where the unfolding effects of tariffs and counter-tariffs are a major risk to future quarters. Uncertain in the outlook are inventories which may, however, continue to build given the underlying strength of consumer demand. But inventories, whose effects are abstract, added disproportionately to the quarter’s results, without which GDP would have come in no better than 1.4 percent.