U.S. economy grows 3.5% in third quarter

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While President Trump hailed the headline figure of 3.5% growth in GDP, there were serious signs of weakness in the quarterly report.

That's slower than the second quarter's blockbuster 4.2 percent, but it puts the economy on pace for the fastest annual growth in 13 years. But Friday's third quarter GDP report may be the best hard evidence yet that the tariffs are causing major disruptions in the economy.

The rise in consumer spending, which accounts for about 70 percent of the economy, unexpectedly accelerated to an nearly four-year high of 4 percent. Similar to the second quarter's sudden surge in exports (mostly soybeans), inventories surged in the third quarter and added 2.2 percentage points to GDP.

"The deceleration in real GDP growth in the third quarter reflected a downturn in exports and a deceleration in nonresidential fixed investment".

On Wall Street, stocks were expected to open sharply lower amid fears about top technology stocks such as Amazon and Google-parent Alphabet, which reported disappointing results before trading began. "That suggests some of this stimulus won't last, it's not going to turn into higher-trend growth through the channel of investment and greater capacity and greater potential growth".

"While business spendings vary substantially quarter over quarter, the slow down came earlier than expected by many economists as a sign of the fading impact of corporate tax cuts and fiscal stimulus", he said.

GDP growth graph
US economy grows 3.5% in 3Q as consumers, government spending boosts GDP

Positive Point for the GDP, the industrial have massively replenished their inventories contributing for 2.07 percentage points to growth, while the deterioration in the trade has on the contrary cost 1,78 point of growth.

The pickup in private and public consumption is "what you would expect" from fiscal stimulus, but the burst in business spending "looks to be fading", said Michael Gapen, chief USA economist at Barclays and a former Federal Reserve official. "Imports, which are a subtraction in the calculation of GDP, increased".

Paul Ashworth, chief United States economist at Capital Economics: "The current strength of the economy is largely due to the boost from the massive fiscal stimulus at the start of this year". That was the fastest pace since the fourth quarter of 2014 and followed a 3.8 per cent pace of increase in the second quarter.

"This may have reflected front-loading of imports (which increased at a 9.1% rate) ahead of scheduled tariff increases - imports which then end up temporarily in stockpiles", Feroli said. Those moves are being made to ensure that tight labour markets, with unemployment at a 49-year low of 3.7 per cent, and strong growth don't trigger unwanted inflation. The core PCE price index rose at a 1.6% annual rate, down from a 2.1% rate in the second quarter.

The Fed raised rates in September for the third time this year and removed a reference to monetary policy remaining "accommodative" from its policy statement. The housing market contracted at its steepest pace in more than a year in the third quarter, also dimming the economy's outlook. That was driven by an unwinding of the hefty boost from net exports in the second quarter when USA exporters of soybeans and other products accelerated shipments to beat retaliatory tariffs from overseas.

However, the drag from trade was probably offset by faster inventory accumulation by businesses stockpiling before USA import duties, on mostly in Chinese goods, came into effect.

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