Economic Watch: GDP Posts Biggest Jump in 2 Years, Consumer Confidence Soars

Overall U.S. economic growth increased more in the third quarter of the year than first projected, according to a new Commerce Department report, and will likely pave the way for an interest rate hike in December.

The gross domestic product (GDP) expanded at a 3.2% annual rate, its highest level in two years and better than a consensus estimate from analysts. This is higher than the 2.9% rate estimated a month ago and far greater than second quarter annual rate of 1.4%.

The increase in the GDP in the third quarter primarily reflected positive contributions from personal spending, exports, private inventory investment, and federal government spending, according to the department. They were partly offset by negative contributions from residential fixed investment and state and local government spending. Imports, which are a subtraction in the calculation of GDP, increased, but a measure of corporate profits increased for the third straight quarter.

“Looking ahead, advance October international trade data suggest that a large gain in food exports that accounted for much of the third quarter export increase is unwinding in the fourth quarter, while early data also suggests that the add from inventories in third quarter will not be repeated,” said Nathan Janzen, senior economist at RBC Economics. “Nonetheless, indicators of growth in final domestic demand have been stronger.”

He noted household spending continues to be supported by improving labor markets and low interest rates. Indications that investment in the oil and gas sector is bottoming out, and three consecutive, though modest, monthly gains in non-defense capital goods shipments through October, point to a modest near-term strengthening in business investment. 

“Today’s report does not alter our view that GDP growth remained at a modestly above-potential rate in the fourth quarter, with a stronger gain in final sales to domestic buyers providing further evidence of a strengthening in the underlying economic backdrop,” Janzen said. “That should be sufficient to clear the way for a widely expected 25 basis point hike (.25%) in the fed funds target range at the Dec 14 Federal Open Market Committee meeting.”

Consumer Confidence Best in Nearly 10 Years

A separate report, also released Tuesday, showed consumer confidence in the U.S. this month hit its highest level since the Great Recession, according to the private research group The Conference Board.

Its Consumer Confidence Index, which had declined in October, increased significantly in November to 107.1, up from 100.8 in October and its highest level since July 2007. The Present Situation Index increased from 123.1 to 130.3, while the Expectations Index improved from 86 last month to 91.7.

“Consumer confidence improved in November after a moderate decline in October, and is once again at pre-recession levels,” said Lynn Franco, director of economic Indicators at The Conference Board. “A more favorable assessment of current conditions coupled with a more optimistic short-term outlook helped boost confidence. And while the majority of consumers were surveyed before the presidential election, it appears from the small sample of post-election responses that consumers’ optimism was not impacted by the outcome.”

With the holiday season upon us, Franco said a more confident consumer should be welcome news for retailers.

This follows the release before Thanksgiving of final November results from the University of Michigan’s Survey of Consumers, which was taken entirely after the presidential election. The post-election gain in the Consumer Sentiment Index was 8.2 points above the November pre-election reading, pushing the Index 6.6 points higher for the entire month above the October reading.

“The post-election boost in optimism was widespread, with gains recorded among all income and age subgroups and across all regions of the country," said Surveys of Consumers chief economist, Richard Curtin. “The upsurge in favorable economic prospects is not surprising given Trump’s populist policy views, and it was perhaps exaggerated by what most considered a surprising victory as well as by a widespread sense of relief that the election had finally ended. To be sure, no surge in economic expectations can long be sustained without actual improvements in economic conditions.”