Robust US gross domestic product (GDP) growth continued in the third quarter (Q3) but at a slower pace just ahead of key congressional elections, while the economy faces mounting headwinds from trade wars, the Commerce Department reported on Friday.
A healthy jobs market with the lowest unemployment rate in 49 years, coupled with strong consumer confidence, likely supported consumer spending, the biggest driver of the U.S. economy. "A downturn in exports" as well as a drop in business investment are responsible for part of the decline from the second quarter, the Commerce Department noted.
"There will come a day of reckoning for the economy after the tax cut monies are all gone, but for today Washington really has something to crow about", said Chris Rupkey, chief economist at MUFG in NY.
"The fate of the consumer rests with the willingness and ability of businesses to keep hiring", said Julia Coronado, president of MacroPolicy Perspectives LLC and a former Fed researcher.
Some of the rebound in imports reflected a rush by businesses to stockpile before United States import duties, mostly on Chinese goods, came into effect. The economy has reverted back to the "same old" model of consumers accounting for most of the growth. Equipment investment cooled to a 0.4% advance, the slowest since 2016, and the rise in intellectual- property spending eased to a three-quarter low of 7.9%.
Trade also dragged down growth by the most in 33 years, amid ongoing tariff battles with large trade partners such as China.
They were counting on an expansion of 3.3%. "Imports, which are a subtraction in the calculation of GDP, increased".
Yet a trade war exists between Washington and Beijing as well as other trade disputes between the US and other trade partners, with the slowdown last quarter mostly reflecting the retaliatory tariffs impact that Beijing imposed on exports from the USA including soybeans.
"Inventories should see the opposite effect, where we expect a significant 2.4 percentage-point contribution after the 1.2pp drag from this volatile category in 2Q", Morgan Stanley's economists said in a preview. "And the tax cut they constructed with President Trump has been staggeringly tilted toward the rich and as inefficient and wasteful as fiscal stimulus could possibly be".
"The risk to the expansion from elevated inflation moved up early in the year, but has eased over the last six months and remains modest compared to risks in the 2000s or in 2011", the authors wrote. World GDP would fall further should Trump follow through on all his trade threats, including global duties on cars, the International Monetary Fund said. That was the most since the second quarter of 1985 and reversed the 1.22 percentage point contribution in the April-June period. Trump has criticized the Fed for raising interest rates without signs of significant inflation.
GDP measures the production of goods and services, but products that are not sold can pull down future production as businesses try to reduce their stocks of inventories. "There's no incentive to change policy direction".
"Generally, the U.s. economy continues to show resilience as it is more than 3% year-over-year, its pace is the highest in the last three years", pointed out Greg Daco economist for Oxford Economics.