U.S economic growth expands in Q3 on consumption and fiscal stimulus

The BEA released the advanced estimate of U.S. third quarter GDP growth report. The economy has grown 3.5 percent sequentially. Domestic sales to final purchasers rose 3.1 percent, lower than the prior quarter, but nevertheless a reasonably solid print. Much of this was driven by personal consumption spending and government spending, a reflection of the ongoing fiscal stimulus.

The soft spot in the report released today was business fixed investment, with structures, equipment and residential investment all decelerating considerably in the third quarter. This implies that the corporate tax cuts have not induced much capital accumulation.

Turning to the external side, net exports subtracted a substantial 1.8 percentage point from GDP. However, this was more than countered by strong inventory accumulation, which contributed 2.1 percentage points to growth. Overall, the comparatively solid showing this quarter was aided by fiscal stimulus, and is thus likely to be temporary.

“We continue to forecast Q4 growth at 3.0 percent q/q saar, and expect growth to gradually moderate over the course of 2019”, added Barclays.

Personal consumption spending rose strongly 4 percent, topping its second quarter growth rate. This was driven by solid goods consumption, while consumption of services remained widely stable. Two straight quarters of strong growth in consumption spending implies households have adjusted their spending behaviour to the lower tax withholdings. Government consumption was the other major contributor to headline GDP, led by rises in national defense spending and state and local government spending. Together, PCE and government spending contributed 3.25 percentage points to the third quarter growth.

Meanwhile, business fixed investment was subdued in the third quarter, in the midst of softness in residential and non-residential categories. Residential investment dropped for the third straight quarter, indicating towards slowing momentum housing activity.

Non-residential investment rose just 0.8 percent, dragged down by a fall in structures investment, and an easing in equipment and intellectual property investment. Business investment did not make any contribution to growth in this quarter. The fall in net exports in the third quarter was mainly driven by a fall in goods exports.

“This marks a sharp reversal from Q2, but was expected given that the Q2 surge was likely on account of exports trying to front-run tariffs. Imports, meanwhile, staged a solid rebound in Q3, also driven by goods”, stated Barclays.

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