- The U.S. economy grew by 1.9% annualized in the third quarter, slightly above market expectations, but in line with our Quarterly Economic Forecast published last month. That is a very mild cooling from its 2% pace in the second quarter.
- Once again, the consumer was the star of the quarter, with spending growth of 2.9%. That is even more impressive given it comes after a 4.6% increase in Q2.
- Business investment fell slightly less than expected (-1.3%). Structures investment fell 15.3%, after dropping 11.1% in the prior quarter with mining exploration, shafts, and wells leading the decline. Equipment outlays also fell 3.8%. In contrast, spending on intellectual property products rose 6.6%. IPP investment is an area of U.S. strength, and is making up an increasing share of the investment picture.
- Residential investment was another bright spot, rising 5.1% after a string of six consecutive quarters of declines.
- Government spending rose 2.0%, helped by a 3.4% increase in federal outlays. Spending at the state and local level rose a more modest 1.1%.
- Export and import growth were modest, rising only 0.7% and 1.2% respectively. Net trade subtracted 0.08%-points from headline GDP, close to our expectations.
- Inventory disinvestment also weighed on growth slightly (-0.05%-points) for the second straight quarter. Inventory levels are being drawn down after a build-up through the latter half of 2018 and early 2019.
Key Implications
- Largely thanks to the consumer, the U.S. economy turned out a better-than-expected performance in the third quarter. That said, it doesn’t change the narrative of an economy that has slowed from an annual pace of around three percent to two percent over the past year. Continued weakness in business investment is concerning, and likely reflects the heightened uncertainty created by the relentless back and forth on the tariff front.
- On the plus side, there was evidence the domestic economy is responding to lower borrowing rates, with the housing market showing signs of perking up, and spending on big-ticket consumer durables expanding at a solid pace. We expect the Fed to lower it’s policy rate another quarter point later today to cushion the economy against slower global growth. This will help extend growth in these interest-sensitive sectors.
