Third quarter GDP: economy grew at 3.5% annual rate

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The U.S. economy grew at a strong 3.5% annual growth rate in the third quarter, backing Republican claims that President Trump is presiding over a boom, with just 11 days to go before a congressional election. .

Growth fell from the 4.2% rate in the second quarter, but the economy still posted its best consecutive quarters in four years – thanks to free consumer and federal government spending – and is within reach. the Trump administration’s 3% annual growth. target.

“Despite all the dithering about the [stock] market, the economy is doing pretty well,” said Ethan Harris, head of global economics for Bank of America Merrill Lynch. “The story here is a double dose of caffeine from tax cuts and spending increases.”

On Friday, Vice President Pence touted the 3.5% growth, writing on Twitter that under Trump, “the US economy is making a REAL COMEBACK after nearly a decade of slow growth.”

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Strong overall growth capped a volatile week on Wall Street, where the Dow Jones Industrial Average gave up all of its gains for the year. Friday’s Commerce Department report also offered a mixed verdict on the outlook for the president to deliver a lasting era of improved economic performance and suggested rising interest rates are starting to bite.

“The details of the growth weren’t as impressive as the 3.5% headline,” Jim O’Sullivan, chief US economist for High Frequency Economics, said in an email.

The administration announced last year’s corporate tax cut as an incentive for business spending on new machinery, computers and factories. Still, the gains evident earlier in the year appear to be fading, according to the report.

Business investment rose 0.8% in the quarter after gaining 8.7% in the previous three months. Spending on new structures fell 7.9% after rising 14.5% in the previous period.

“That probably tells us that growth in the fourth quarter will be a bit slower,” said Ben Ayers, senior economist for Nationwide Insurance.

Another major negative: trade sapped $20.7 trillion from the strength of the economy, as imports outpaced exports by a growing margin, the report said. The president has made reducing the trade deficit a key objective, but has yet to see progress after 21 months in office.

Since January, Trump has imposed tariffs on solar panels, washing machines and industrial metals made overseas and on about half of the $505 billion in goods the US imports annually from China. .

His threats of additional tariffs on Chinese goods may have encouraged U.S. companies to increase imports to beat rising prices, economists said.

The third-quarter results fell short of the expectations of the president, who promised in July that the third-quarter figure would be “much higher” than the 4.2% in the second quarter.

Shortly after taking office in 2017, the president promised a “return to 4% annual economic growth,” a mark the United States has not reached since 2000. But administration officials such as Treasury Secretary Steven Mnuchin more recently described years of 3% a year. growth as a goal.

While the economic report is good news for the president, it will likely provide only a limited policy boost to Republicans, according to Matt McDonald, a Hamilton Place Strategies partner who worked as a White House communications assistant for President George W. Bush.

“Where the administration has struggled is tying low unemployment and the strength of the economy to whatever measures it has taken, such as the tax cut,” he said. he declares.

By a margin of 61% to 30%, voters last month said Trump’s tax cut favored ‘big business and the wealthy’ over ‘middle-class families’ in an internal Republican poll obtained by Bloomberg News.

Continued volatility in financial markets could also undermine voters’ sense of well-being. The Dow fell more than 296 points on Friday, continuing a slide that has shaved more than 2,100 points from the benchmark since Oct. 3.

Over the past month, investors have lost more than 6% on the Dow Jones and more than 10% on the tech-heavy Nasdaq index.

The market outlook is clouded by the Federal Reserve’s plans to continue raising interest rates. The country’s central bank has raised short-term rates three times this year, to a range of 2-2.25%, and is expected to raise them again next month.

This drives up borrowing costs, which squeezes the housing industry. Residential investment fell 4%, its third consecutive negative quarter.

With mortgage rates topping 5%, sales of new single-family homes last month fell 5.5% from the previous month to a seasonally adjusted annual rate of 553,000, the fourth consecutive monthly decline, according to a government report on Thursday.

September’s sales volume was more than 13% lower than the same month a year earlier, and figures for the previous three months were also revised down.

The trade GDP report – a preliminary estimate that will be revised twice in the coming weeks – comes as Trump again this week criticized Fed Chairman Jerome H. Powell for raising interest rates. interest, calling the country’s central bank “the biggest risk” to continued growth.

With the unemployment rate at its lowest level since 1969, the Fed raised interest rates to keep inflation from taking off. Prices are rising at an annual rate of 2%, according to the Fed’s preferred gauge.

Still, Friday’s economic news was better than most analysts had expected. Strong consumer spending and government spending boosted growth in the July-September period. A buildup in goods inventories also helped, suggesting potential weakness ahead if companies cut production while selling off any backlogs.

“The economy continues to grow well above its potential, which is quite remarkable,” said economist Michael Strain of the American Enterprise Institute, citing an expansion that hasn’t seen a recession since 2009.

Friday’s report showed few signs of a lasting improvement in economic conditions. The fastest way to a higher standard of living is for the nation’s workers, farmers, and factories to produce more with the same resources. But the United States has struggled for years to achieve higher productivity.

“Based on today’s numbers, we estimate that non-farm business productivity grew at an annual rate of 1.6% last quarter and just 1.1% a year ago,” he said. writes JPMorgan Chase economist Michael Feroli in a note to clients. “That figure is right in the middle of the dismal rut it’s been in for the past decade.”

The latest economic bulletin, prepared by career Commerce Department officials, capped off a week of mixed economic news. On Thursday, the Census Bureau said new orders for durable goods rose 0.8% better than expected in September. And the labor market has remained strong, with new jobless claims remaining near half-century lows, according to a separate Labor Department report.

As the Nov. 6 congressional election looms, Republicans will celebrate the economy’s robust growth — while ignoring economists’ forecasts that growth will slow next year — and Democrats will complain that the gains are not not shared equally.

“The best is yet to come,” said House Ways and Means Committee Chairman Kevin Brady (R-Tex.) “I think there will be even stronger growth in the long run.”

The left-leaning Center for American Progress, meanwhile, said “working and middle class workers” have yet to see anything from Trump’s tax cut. Falling corporate tax revenues are driving bloated deficits and fueling Republican calls for cuts to Medicare and Social Security, the group said in an analysis of the GDP results.

Only one other major economic snapshot will be released before midterm – monthly job growth and unemployment numbers on Nov. 2.

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