Third-quarter GDP numbers fuel talk that the Federal Reserve will raise interest rates next month for the first time in many years – despite a disappointing report on manufacturing.

The U.S. Commerce Department reported Tuesday that the gross domestic product, a measure of the total output of the nation's goods and services, increased at a 2.1% annual rate. That's an improvement over last month's estimate of a 1.5% pace for the quarter.

The improvement reflected positive contributions from personal consumption expenditures, nonresidential fixed investment, state and local government spending, residential fixed investment and exports.

Business inventories also declined in the quarter, cutting just .59 of a percentage point off the overall GDP figure, rather than 1.44 percentage point in the report a month earlier, according to Reuters.

The consumer spending level again was reporting to be growing at a brisk pace, expanding at a 3% pace versus 3.2% in last month’s report. That slight decline was more than offset by business spending on equipment, expanded greatly from the original 5.3% growth estimate to 9.5%.

Despite this improvement in this second reading of the GDP for the third quarter, the rate is still lower than the 3.9% pace in the second quarter of 2015 – but well ahead of the 0.6% rate in the first quarter.

With the upward revision to third quarter GDP growth, the economy is now expanding at a rate close to the economy’s long-run average rate, according to RBC Economics.

“The maintenance of this solid pace of domestic spending argues in favor of the U.S. Federal Reserve starting to withdraw some of the currently highly stimulative monetary conditions,” said Paul Ferley, assistant chief economist at RBC. “Our forecast assumes that at the Dec. 16 Federal Open Market Committee meeting, the Fed will opt to raise the current fed funds range by 25 basis points to 0.25% to 0.50%.

"The emergence of financial market volatility globally stayed the Fed’s hand at the September policy meeting, though these pressures have subsequently eased allowing the Fed to focus on the solid domestic economic conditions.”

November Manufacturing Eases Up

Meantime, a Monday report from the financial information services provider Markit shows manufacturing in November was dealt a setback following the modest rebound recorded the previous month.

Its Flash U.S. Manufacturing Purchasing Managers’ Index fell to 52.6, down from 54.1 in October, the slowest improvement in overall business conditions since October 2013, but still above the neutral 50 threshold.

Reports from survey respondents generally cited a cyclical slowdown in demand patterns and ongoing weakness in export sales, according to Markit. Reflecting this, the index measuring new orders from abroad dipped back inside negative territory in November. Lower levels of new work from abroad were linked to a combination of the strong dollar and weaker global economic conditions.

Despite the decline, this measure still suggests the goods-producing sector is expanding at a robust pace, which should help support wider economic growth in the fourth quarter, according to Chris Williamson, chief economist at Markit.

“The survey data are broadly consistent with manufacturing output growing at an annualized rate of at least 2% in the fourth quarter so far,” he said. “With the survey continuing to show modest growth, and any weakness linked to the global economy rather than a deterioration in domestic demand, there seems little in the survey results to throw up any roadblocks to a Fed that seems intent on hiking interest rates in December.”

About the author
Evan Lockridge

Evan Lockridge

Former Business Contributing Editor

Trucking journalist since 1990, in the news business since early ‘80s.

View Bio
0 Comments