The U.S. economy grew at a 3.5% annualized pace in the third quarter according to the BEA’s second estimate. This matched the advanced estimate (3.5%), and market expectations. Beneath the headline, a slight downward revision to consumer spending was offset by an upward revision to business investment.
Real personal consumer spending remained strong but was revised down to 3.6% from the initial 4% estimate. This largely reflected weaker growth in durable goods (3.9% annualized, versus 6.9% in the advance estimate).
Business investment was revised up to 2.5% from a 0.8% gain reported in the advance estimate. The revisions came in structures spending, which now fell 1.7% (-7.9% adv.) and equipment outlays, which rose 3.5% (0.4% adv.). Spending on intellectual property was revised down to 4.3% (7.9% adv.).
Residential investment was also revised up, and is now estimated to have declined 2.6% in the third quarter (previously: -4.0%).
Government spending was revised down to 2.6% (3.3% adv.) on weaker spending at the state and local level.
Exports were revised down to a 4.4% drop (-3.5% adv.), while imports were essentially unchanged at a 9.2% jump. That means net trade subtracted 1.9 percentage points from growth (-1.8% adv.), a shift which was largely offset by a bigger contribution from inventory building (+2.3 p.p. vs 2.1 p.p. adv.).
Corporate profits for the third quarter were also released, and were up a healthy 14.3% annualized before taxes (and including inventory and capital adjustments). That marks the second straight quarter of double-digit gains in profits, which were up 10.3% versus a year ago. That marks the fastest year-on-year growth in profits since 2012. Corporate profits now account for 11.2% of GDP, the highest share in three years.
Key Implications
Once again the revisions in the second estimate of GDP were uneventful. If anything, the composition of growth is more encouraging with a better showing for business investment. Looking ahead, monthly indicators point to a slower, but still solid, pace of growth in the fourth quarter (between 2 – 2 ½%). Slower growth will largely reflect a moderation in consumer spending, as the boost from tax cuts that lifted spending through the middle of the year fades.
On the plus side, healthy growth in corporate profits suggests businesses have the capacity to keep investing, if they remain confident about future demand. With various measures of business confidence starting to show strain from the ongoing ratcheting up of import tariffs and retaliation on U.S. exports, the question is whether worries will translate into revised capital expenditure plans. The drop in oil prices adds another negative to the outlook for investment in the oil patch.
As 2019 quickly approaches the risks to the downside are mounting. We will hear from the Fed Chair at noon today, and hopefully get a better sense of how the Fed is weighing the downside risks. So far, the Fed seems likely to remain on track to gradually normalize monetary policy. With inflation at target and the economy running hot, we anticipate that the Fed will raise rates in December, but there is downside risk to our expectation for hikes in 2019.
