U.S. economy grew at strong 3.5 percent rate in 3rd quarter

US economy grows 3.5% in 3Q as consumers, government spending boosts GDP

US economy grows 3.5% in 3Q as consumers, government spending boosts GDP

The U.S. economy grew 3.5 percent in the third quarter of 2018, according to the Commerce Department on Friday.

The report showed that consumer spending, which accounts for 70 per cent of economic activity, surged at an annual rate of 4 per cent in the third quarter, even better than the 3.8 per cent gain in the second quarter and the best showing since last 2014. That was driven by an unwinding of the hefty boost from net exports in the second quarter when US exporters of soybeans and other products accelerated shipments to beat retaliatory tariffs from overseas.

The Commerce Department is set to release its first reading on how the United States economy performed in the third quarter at 8:30 a.m. ET.

The latest GDP report also showed that investment spending on business plant and equipment and residential structures (homes, townhomes, condos, and apartments) actually fell from July through September.

"For GDP to rise above estimates of around 2.5 percent growth next year, businesses are going to have to kick in with higher wages as the workforce tightens, and with more investment", Frick said.

What Our Economists SayThe economy has reverted back to the "same old" model of consumer-driven activity that has dominated most of this cycle. Spending on motor vehicles and parts added just 0.09 percentage point to third-quarter GDP.

However, strong demand in the USA brought in large numbers of imported motor vehicles and consumer goods. Imports increased in the third quarter after decreasing in the second.

The slowdown in business spending "came earlier and was more than we expected, given where the stimulus is", Coronado said.

The Congressional Budget Office points to several reasons for that: the expiration of personal income tax cuts, slower growth in federal spending, and higher interest rates and prices. Stocks on Wall Street were trading lower after Amazon gave a below par holiday-season sales forecast and Google-parent Alphabet reported quarterly revenue that missed analysts' estimates.

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Private inventories added 2.07 percentage points to the third-quarter growth rate, a reversal from the second quarter when companies drew down on stockpiles to get ahead of retaliatory tariffs.

But some economists worry that the recent stock market declines could be a warning signal of a coming slowdown.

Last month, the Federal Reserve boosted its growth projection to 3.1 percent for 2018, but it saw growth slowing to 2.5 percent next year.

Compared to the third quarter of 2017, the economy grew 3%, the best performance since the second quarter of 2015, keeping it on track to hit the Trump administration's 3% growth target this year.

That was the fastest pace since the fourth quarter of 2014 and followed a 3.8% pace of increase in the second quarter.

On Friday, October 26, the US stock market fell again.

Higher interest rates are pressuring the housing market, businesses are struggling to find workers and the import tariffs are increasing manufacturing costs for companies, such as Caterpillar, 3M and Ford.

While consumer spending continues to be robust, business investment appears to have stalled in the July-September period according to economists at Morgan Stanley. The housing market contracted at its steepest pace in more than a year in the third quarter, also dimming the economy's outlook.

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