US economy keeps growing strong at 3.5% in the third quarter

The US economy grew at an annualized rate of 3.5% in the third quarter,...

Posted: Oct 27, 2018 12:27 PM
Updated: Oct 27, 2018 12:27 PM

The US economy grew at an annualized rate of 3.5% in the third quarter, the government said Friday.

That's still strong, though lower than the 4.2% clip the economy grew during the second quarter. It was the sixth consecutive quarter with growth above 2%.

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The slowdown from last quarter was due in part to a deceleration in business investment, which boomed in the first half of the year in part because of the dramatic tax cut enacted at the end of 2017.

Net exports also declined from a surge last quarter as manufacturers and farmers rushed to sell their goods overseas in advance of expected retaliatory tariffs from China. In recent months, retailers boosted their imports, leading to a buildup in inventories.

The growth figure was in line with economists' forecasts, which had come down in recent days after the release of lackluster home sales data.

Real disposable personal income grew at an annual rate of 2.5%, the same as last quarter. That's slightly above the 2.35% average growth since the end of the last recession in late 2009. But it's considerably less than the 4.0% increase in consumer spending.

"Four percent growth is a phenomenal performance," said Scott Anderson, chief economist at the Bank of the West. "We don't think that's sustainable. We think spending is getting a little ahead of incomes. Some of those interest-rate sensitive spending categories are going to feel more pressure as interest rates continue to rise."

Government spending continues to fuel growth, especially on defense, which grew 4.5%. State and local spending also grew at their fastest rate since the first quarter of 2016.

Kevin Hassett, chair of the White House's Council of Economic Advisers, said he expects the economy to average about 3% growth for 2018. "Headline for me is that we have a whole year of 3% growth, which is one of President Trump's promises," he said.

In fact, in July President Donald Trump predicted that "We're going to go a lot higher" than the 4.2% achieved in the second quarter, and has been out selling the robust economic numbers on the campaign trail. Although the year will finish out with annual growth somewhere below the 4% he has often promised, anything above 3% would be the highest rate since 2005.

"It's a very good news story — 3.5% is at expectation for us for the quarter," Hassett added.

The personal consumption expenditures price index, a measure that the Federal Reserve watches carefully when deciding whether to raise interest rates, rose only 1.6% in the third quarter. That's down from 2% from last quarter, and considerably short of the Fed's inflation target.

A continued moderation in inflation may tamp down fears that the economy is overheating, weakening the case for hiking rates. Morgan Stanley wrote in a note Friday morning that the new data indicate a recession is not around the corner.

"The risk to the expansion from elevated inflation moved up early in the year, but has eased over the last six months and remains modest compared to risks in the 2000s or in 2011," the authors wrote.

Minutes from the Federal Reserve's September meeting indicated policymakers intend to continue gradually raising rates.

The GDP number is preliminary and may be revised in the coming months.

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