GDP grew 1.9% year on year in the third quarter

Neither trade wars nor the nervousness of actions are deterring American consumers, who continue to support the economy.

The economy slowed, but continued to grow solidly in the third quarter, as consistent consumer spending and a housing rebound offset another decline in business investment triggered by trade and global unrest.

The country’s gross domestic product – the value of all goods and services produced in the United States – grew at a seasonally adjusted annual rate of 1.9% during the July-September period, after growing 2% in the second quarter, the Commerce Department said on Friday. Economists forecast a gain of 1.6%.

The report came out just hours before the Federal Reserve cut interest rates on Wednesday, the third cut in three months in a campaign to stave off a possible recession. The risk of a slowdown has eased somewhat in recent weeks after the United States and China agreed to an interim truce in their trade war that likely suspends future tariffs on Chinese imports but leaves the existing rights in place.

In addition, the risk of a “hard Brexit” that would not include trade deals between Britain and Europe has faded. And long-term Treasury bond yields slightly exceeded short-term rates, reversing a so-called “inverted yield curve” that had signaled a grim outlook.

But the trade struggle still dampens business confidence and investment, compounding the effects of a sluggish global economy that has hurt America’s manufacturing sector. And the boom in the economy thanks to federal tax cuts and increased spending driven by President Trump’s increases is fading. Wells Fargo forecasts the economy to grow 1.5% in the second half of the year, compared to about 2.5% in the first half and 1.7% in the first half of 2020.

Many economists still predict a high risk of a recession next year as Trump heads for a presidential election in November.

Consumer spending is on the rise

Consumer spending rose 2.9% in the third quarter, below the lightning pace of 4.6% in the second quarter, but more than expected. Consumers have generally ignored the trade stalemate, which has started to drive up retail prices.

Job growth slowed, but the unemployment rate fell to a new 50-year low of 3.5% in September and wages rose about 3% a year, putting more money in the pockets of buyers. The stock market, while volatile, recently hit record highs.

Consumption represents about 70% of economic activity.

Consumer confidence has plummeted in recent months amid the trade battle and slowing global growth and retail sales tumbled last month.

“Cracks are starting to materialize in the consumer, the bedrock of the US economy,” Wells Fargo wrote in a research note ahead of Wednesday’s report.

Business investment drops

Business investment fell 3% after falling 1% in the second quarter. Spending on structures fell 15.3%, in part due to a decline in oil drilling amid falling prices, while spending on equipment fell 3.8%.

The trade war has raised the price of many Chinese imports, including factory parts and retail products, pressing manufacturers and retailers. The stalemate, along with weak growth abroad, has also curtailed US exports. The trade battle has also generated uncertainty, prompting companies to delay new projects.

Two temporary factors – the grounding of the Boeing 737 Maxs following two crashes and the now settled General Motors strike – also played a role in the slowdown, according to Nomura economist Lewis Alexander.

Residential investment rebounds

Construction of new single-family homes and apartments, as well as renovations, rose 5.1%, breaking a streak of six consecutive quarterly declines. Average 30-year fixed mortgage rates fell to 3.75% from 4.86% a year ago, boosting home purchases and construction. This made it possible to compensate for a shortage of manpower and of available land which constrained the builders.

Public spending is increasing

Federal, state and local spending rose 2%, down from a 4.8% increase in the second quarter. Federal spending rose 3.4% while states and local governments edged up 1.1%. The $ 300 billion in additional federal spending approved by Congress in early 2018 has continued to stimulate the economy, but the stimulus is expected to run out of steam by the end of the year.

Trade is a brake on growth

US exports rose 0.7%, following a 5.7% drop in the second quarter. Trump’s tariffs on $ 360 billion in Chinese imports triggered counter-tariffs by China that cut shipments of soybeans, vegetables and other products. At the same time, imports increased by 1.2%. As a result, trade as a whole subtracted a slight 0.08 percentage point from growth.

The bottom line

While economic output grew faster than expected in the last quarter, growth slowed from an annual clip of 3% in the first nine months of 2018 to 2% in the past year, roughly in line with the lukewarm rhythm that marked the 10-year record. old extension. Federal tax cuts and increases in spending delivered Trump’s promised 3% gain, but that stimulus is now fading.

Ian Shepherdson of Pantheon Macroeconomics expects the economy to grow only 1% in the fourth quarter as the trade war and weak business investment take its toll.

“Thanks in large part to the consumer, the US economy has performed better than expected,” said economist Leslie Preston of TD Economics. “That said, that doesn’t change the narrative” of a slowing economy.

This was the Commerce Department’s first estimate of third-quarter GDP growth. It will release two revised estimates in the coming weeks.

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