Highlights:
- US Q3 GDP rose 2.6% – down slightly from the 3% increases in Q2 and Q3 but still a solidly ‘above-potential’ pace.
- The Fed will likely be encouraged by both the headline growth number and the composition – in particular another solid gain in business investment.
- Our forecast assumes further gradual interest rate hikes from the Federal Reserve will be warranted. We don’t expect the Fed to hike next week but look for another 4 increases over the course of 2018.
The 2.6% headline GDP increase was slightly below market expectations for a 3% gain but despite a whopping 4.3% jump in final domestic demand. Household spending accounted for a big chunk of that increase with consumer spending up 3.8% and residential investment jumping almost 12%. Business nonresidential investment also rose solidly, though, at a 6.8% rate. That marked a 7th consecutive quarterly gain in business spending. All of that domestic demand growth drove imports higher by 13.9%. That left net trade subtracting more than a percentage point from headline GDP growth despite a solid 7% increase in exports. Inventories also built at a slower pace, subtracting 0.7 percentage points from headline growth.
The pace of Q4 GDP growth is still well above most estimates of the economy’s long-run ‘potential’ growth rate at a time when the economy is probably already bumping up against capacity limits – and with tax cuts likely to provide at least a modest further lift going forward. The economy looks clearly strong enough to absorb further rate hikes from the Fed. With inflation still tracking below the central bank’s 2% objective, though, the pace of tightening is expected to remain gradual. We don’t expect a rate hike at next week’s FOMC meeting but do expect the Fed will eventually raise the fed funds range by 100 basis points over the course of 2018.
