The U.S. economy expanded at a 3.5 per cent pace in the third quarter as consumers opened their wallets, businesses restocked inventories and governments boosted spending, marking the strongest back-to-back quarters of growth since 2014.

The annualized rate of gains in gross domestic product compared with the 3.3 per cent median estimate in a Bloomberg survey and followed a 4.2 per cent advance in the prior three months, according to Friday's report from the Commerce Department.

Consumer spending, which accounts for about 70 per cent of the economy, unexpectedly accelerated to a 4 per cent increase -- the best since 2014 -- while the 0.8 per cent gain in nonresidential business investment was the weakest in almost two years. In two volatile categories, inventories provided the biggest contribution since early 2015, while the drag from trade was the largest in 33 years. Government spending rose by the most since 2016.

The data indicate a robust job market and lower taxes continued to propel demand among consumers and companies, giving President Donald Trump an opportunity to showcase his policies heading into the midterm congressional elections. At the same time, tariff-related bottlenecks and the trade war with China are headwinds for the nation's second-longest economic expansion on record.

Investors have become less sanguine on the outlook amid the latest run of U.S. company earnings reports, though stocks regained some ground on Thursday. Shares of Caterpillar Inc., an economic bellwether, tumbled this week after the maker of mining and construction equipment said manufacturing costs were higher due to rising material and freight costs.

More broadly, the International Monetary Fund earlier this month cut its global growth forecast for the first time in two years, blaming escalating trade tensions and stresses in emerging markets. World GDP would fall further should Trump follow through on all his trade threats, including global duties on cars, the IMF said.

Final Demand

Excluding the volatile trade and inventories components of GDP, final sales to domestic purchasers increased at a 3.1 per cent pace, slowing from 4 per cent. Economists monitor this measure for a better sense of underlying demand. Excluding government spending, the measure of private demand also rose 3.1 per cent.

Consumer spending compared with projections for a 3.3 per cent advance, and followed the second quarter's 3.8 percent gain. It contributed 2.69 percentage points to growth. Purchases rose across most major categories including motor vehicles, recreational goods, food and clothing, in part reflecting the support from steady hiring and the lowest unemployment rate in about five decades.

Hurricane Florence, which made landfall in North Carolina on Sept. 14, “disrupted consumption and business activities, including utilities,” while emergency and other services “likely increased in response to the disaster,” the Commerce Department said. The government said it couldn't estimate the overall impact of the storm on third-quarter GDP.

Talking Point

Even so, the GDP figures give Trump a timely talking point during campaign rallies, and yet another chance to claim the robust expansion for his own following the biggest tax overhaul since the Reagan era. GDP rose 3 per cent from a year earlier, the most on that basis since 2015 and matching the administration's goal.

Yet growth is expected to moderate in 2019 as the effects of the tax cuts wane, while tariffs and a strong dollar weigh on the economy. Borrowing costs also may keep rising, as investors project the Federal Reserve will raise the benchmark interest rate for a fourth time this year in December.

Even with growth and employment above what most analysts and central bankers see as the economy's sustainable capacity, inflation remains contained. Price data in the GDP report showed inflation at a 1.6 per cent annualized pace last quarter, below the Fed’s 2 per cent goal. Excluding food and energy, the central bank's preferred price index also rose at a 1.6 per cent rate.

Business Investment

Nonresidential fixed investment -- which includes spending on equipment, structures and intellectual property -- contributed just 0.12 percentage point to growth, following 1.15 point in the second quarter.

Within that category, spending on structures shrank 7.9 per cent, the biggest drop in almost three years, following a 14.5 per cent surge in the prior period that partly reflected investment in oil production. Equipment investment cooled to a 0.4 per cent advance, the slowest since 2016, and the rise in intellectual- property spending eased to a three-quarter low of 7.9 per cent.

Housing remained a weak spot, posing the third consecutive drag on GDP growth, with a contraction of 4 per cent. Recent reports indicate the industry is slowing amid higher prices and rising mortgage rates, as well as a lack of affordable listings.

Inventories, Trade

GDP growth last quarter benefited from a rebuilding of inventories, which dragged down expansion in the prior period amid tariff-related supply-chain disruptions and steady demand. The third-quarter increase was broad-based and led by wholesale trade, particularly farm products, and manufacturing, according to the Commerce Department.

The trade component reflected a widening deficit, with a 3.5 per cent decline in exports and a 9.1 per cent increase in imports. That was driven by an unwinding of the hefty boost from net exports in the second quarter when U.S. exporters of soybeans and other products accelerated shipments to beat retaliatory tariffs from abroad.

Solid domestic demand and some front-loading of imports ahead of a January rise in levies on Chinese goods may further widen the trade gap.

Other Details

  • Government spending increased at 3.3 per cent rate, contributing 0.56 percentage point to growth; federal outlays rose 3.3 per cent amid a 4.6 per cent gain in defense spending, while state and local outlays increased at a 3.2 per cent rate, the most since 2016
  • The savings rate fell to 6.4 per cent from 6.8 per cent
  • The GDP estimate is the first of three for the quarter, with the other releases scheduled for November and December when more information becomes available