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Economic Watch: GDP Growth Roars Back, Hits 'Turning Point'

October 28, 2016

By Evan Lockridge

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Growth in the U.S. economy accelerated in the third quarter of the year, posting its biggest gain in two years, according to Commerce Department numbers released Friday morning. However, a separate report shows consumer confidence slipped.

The nation’s gross domestic product (GDP) expanded at an annual pace of 2.9% from July through September.

This is up sharply from an annual rate of barely more than 1% in the first half of the year and a 1.4% pace in the second quarter. And it's better than a 2.5% consensus estimate from Wall Street analysts.

“The economy hit a turning point in the third quarter with more balanced growth; still not running on all cylinders, but getting closer,” said Diane Swonk, analyst at DS Economics in her Twitter feed.

Adding to the improved GDP growth rate were positive contributions in the form of personal spending (though down from the previous quarter); exports, which had the biggest gain in about three years; as well as increased private inventory investment and federal spending.

While the acceleration in GDP growth was encouraging, details were somewhat less favorable, according to Royal Bank of Canada Economics. In particular, they pointed to a sharp add to growth from the volatile inventory component, contributing 0.6 of a percentage point to the third quarter growth rate following a 1.2 percentage point subtraction in the second quarter; and a large addition from net trade that RBC said “looks too strong to be sustained given U.S. dollar strength.”

“Although the details of the report point to some early downside risk to our forecast for a 2.7% GDP gain in fourth quarter, we continue to expect underlying activity has returned to an above-trend pace of growth after a disappointing first half of the year,” said Nathan Janzen, RBC senior economist.

He noted household spending continues to be supported by improving labor markets and low interest rates, while the pull-back in activity in the oil and gas sector appears to be bottoming out, which should support stronger business investment. Also, while the U.S. dollar has continued to appreciate, the pace has not been as pronounced as in 2015, providing reason to expect that at least part of the now two consecutive quarterly export gains reflects an easing in underlying external demand weakness.  

“Today’s report is likely to do little to alter the Federal Reserve's characterization from the September policy statement that economic activity ‘has picked up’ from the first half of the year and, as such, will do little to change expectations for the next hike in interest rates, with markets currently pricing in about three-quarters of a hike by the Dec. 14 policy announcement,” Janzen said.

Since the Great Recession ended in mid-2009 the economy has grown at roughly a 2% annual rate, making the current expansion the weakest on records back to 1949, according to the Wall Street Journal. It reported the economy this year isn't likely to top 2015’s 2.6% growth rate, the best annual reading of the expansion. “The economy has failed to grow better than a 3% in any year since 2005, and many economists expect such growth will remain a rarity,” WSJ said.

Consumer Sentiment Dims, May Be A Blip

While increased personal spending added to GDP growth in the third quarter, it didn’t translate into increasingly good feelings by consumers with the start of the fourth quarter.

Final results of the University of Michigan survey of Consumers for October show its Index of Consumer Sentiment fell to the same low recorded last September and to the lowest level since October 2014.

“The October decline was due to less favorable prospects for the national economy, with half of all consumers anticipating an economic downturn sometime in the next five years for the first time since October 2014,” said Surveys of Consumers Chief Economist Richard Curtin. “Nonetheless, the October rise may simply reflect a temporary bout of uncertainty caused by the [presidential] election."

Bloomberg Markets noted that this consumer sentiment report contrasts with a separate weekly measure of confidence released Thursday that climbed the most since January 2015 on more optimistic views on the outlook for the U.S. economy.

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