U.S. economic growth slows less than expected in Q3

Randal Sanchez
October 30, 2018

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.

"The U.S. economy grew at a faster-than-expected rate in the third quarter as inflation was kept in check and consumer spending surged, according to data released by the Commerce Department on Friday", writes CNBC.

Yet the government is also locked in a bitter trade war with China as well as trade disputes with other trade partners and the last quarter's slowdown mostly reflects the impact of Beijing's retaliatory tariffs on US exports, including soybeans.

"The deceleration in real GDP growth in the third quarter reflected a downturn in exports and a deceleration in nonresidential fixed investment".

A 3.5% growth in the 3rd quarter is the second strongest in the past four years, after the 2nd quarter of 2018.

Kevin Hassett, chair of the White House's Council of Economic Advisers, said he expects the economy to average about 3% growth for 2018. That hasn't happened since 2005.

This year's third-quarter figure was fueled by strong consumer spending, but newly enacted trade tariffs between the US and China acted as a drag on the figures. Consumer spending probably got a boost from the individual tax cuts, but business investment - the most important factor associated with the Republican tax plan and the one that was supposed to drive a big increase in capital investment and, eventually, wages - is showing no signs of a boom. Growth in consumer spending, which accounts for more than two-thirds of U.S. economic activity, increased at a 4.0 per cent rate in the third quarter.

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The target range for the federal funds rate, now at 2 percent to 2.25 percent, is nevertheless still low by historical standards. Many Fed policymakers expect higher borrowing costs to begin to restrain growth after two or three more rate hikes.

On the other hand, the Trump administration is optimistic, particularly as the report showed inflation remains contained: Excluding food and energy, the Fed's preferred price index also rose at a 1.6 percent rate.

Farmers front-loaded shipments to China before the tariffs took effect in early July, boosting second-quarter growth.

The Fed noted recently its projection of annual growth to 3.1%, while since the financial crisis ten years ago, the recovery has been the slow and poor of history.

While that would mark a slowdown from 4.2 percent in the second quarter, it would still well exceed the economy's growth potential, which economists put at about 2 percent. Analysts had cautioned that the previous increase in exports was sparked by looming tariffs by China in its ongoing trade war with the United States. By buying more, the importers seem to have anticipated, in July and August the second round of tariffs on chinese goods imposed in September.

Gregory Daco, chief USA economist for Oxford Economics, said he expects more modest GDP growth in coming quarters, citing the fading impact of the tax cuts, higher interest rates from the Federal Reserve and increasing trade tensions. So far, much of the money from the tax cuts is not going directly to investments, but instead to stock buybacks, something Democrats predicted in their opposition of the bill. Borrowing costs also may keep rising, as investors project the Federal Reserve will raise the benchmark interest rate for a fourth time this year in December.

Housing continued to be a drag, falling for a third straight quarter.

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