This is the BEA’s initial guess at the third quarter’s GDP growth rate, and it estimates output to have risen by just 2.9%, following 1.4% in the previous quarter. Real final sales (GDP less inventories) were fractionally worse at 2.3%. Real gross domestic purchases (GDP less exports plus imports) were estimated at 2.0%, following a 1.2% rise in the second quarter. Headline nominal GDP rose by 4.4% from 3.7%. Aggregate inflation for the entire economy, as measured by the GDP price index, was pegged at 1.5%, up from the second quarter’s 2.3% growth rate. Excluding food and energy, the PCE price index rose 1.6% in the quarter (annualised), which was the same as in the previous quarter.
Underlying sector growth in the quarter paints a slightly more mixed picture of activity with personal consumption increasing by 2.1% and business investment rising by just 1.2%; this was the result of an 2.7% drop in equipment spending (the fourth consecutive decline) against an increase of 5.4% in structures investment. In terms of actual percentage-point contributions, the third-quarter change in economic activity was driven by: 1) personal consumption (1.47 percentage points), 2) net exports (0.83 percentage points), 3) inventories (0.63 percentage points), 4) business investment (0.15 percentage points), and 5) government spending (0.09 percentage points). Meanwhile, residential investment subtracted 0.24 percentage points.
Based on the headline rate, this was the best quarter for growth so far, which isn’t saying much, given the weak performance in the prior quarters. Scratching below the surface, however, it could have been better. Inventories accounted for much of the growth, and excluding these, the previous quarter (Q2) was actually stronger. Changes in inventories have been a major swing factor over the last few quarters, in that up until Q2 they had been a drag on GDP growth for an unprecedented five consecutive quarters. The quarter started with solid momentum, then dipped in August for reasons that are still a little vague but likely related to the uncertainties created by the elections and Brexit as well as simple general economic weakness. Activity has been tangibly better through September, however. Despite the still-strong dollar, businesses seem to be adjusting to this headwind with net exports positively contributing to growth for a third straight quarter (thanks in large part to soybean exports). Business investment, however, remains incredibly disappointing, and while it increased in the past quarter, the annual rate of change was again negative, making it the sixth straight quarter of weakness. Overall, this quarter was an improvement on growth rates seen earlier in the year and suggests the economy regained some momentum; however, in an absolute sense, activity is still quite middling. As far as the Fed is concerned, this is largely backward looking data, but nevertheless still quite useful and certainly strong enough to allow it to continue along its path of a desired rate increase in December.
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Richard de Chazal, CFA is a London-based macroeconomist covering the U.S. economy and financial markets.