US economy holds up with 1.9% growth on consumer strength

Washington: A resilient American consumer helped the US economy expand more than forecast in the third quarter, assuaging concerns for now of a more pervasive slowdown tied to weakening business investment and faltering export markets.

Gross domestic product expanded at a 1.9 per cent annualised rate, according to Commerce Department data Wednesday that topped forecasts in a Bloomberg survey that called for 1.6 per cent growth. That’s down from 2 per cent in the second quarter.

The gain mainly reflected strength in consumer spending, the biggest part of the economy, which increased at a 2.9 per cent rate and exceeded projections for a 2.6 per cent rise. For businesses, nonresidential fixed investment fell the most since late 2015.

Final sales to domestic purchasers rose an annualised 2 per cent after 3.6 per cent in the previous three months, signalling a moderation in underlying demand.

The growth figures come just hours before Federal Reserve officials are expected to announce a third-straight interest-rate cut to support the expansion and ahead of Friday’s jobs report, which economists project will show hiring slowed further. Signs of stabilisation may be a welcome sign for President Donald Trump as he campaigns on his economic record, though his trade war with China and faltering global growth have weighed on the expansion.

A separate report Wednesday by the ADP Research Institute showed private payrolls rose by a better than estimated 125,000 in October, rebounding somewhat from a four-month low.

Investment, Exports

The GDP report’s composition showed a second-straight contraction in nonresidential investment, which fell an annualised 3 per cent after declining 1 per cent in the second quarter. Net exports were a slight drag on the expansion, subtracting 0.08 percentage point from growth as inventories also weighed slightly. Federal spending drove a gain in government consumption.

The report on GDP, the broadest measure of all goods and services, isn’t likely to swing the Fed’s rate decision as officials close a two-day meeting, though they may see greater consumer strength as an important sign that the economy is weathering sluggishness from overseas markets.

The International Monetary Fund recently cut its projection for global growth this year to 3 per cent, the lowest since the financial crisis, as signs of stress menace economies from China to Europe. US goods-trade figures this week showed exports and imports both fell in September to the lowest levels in more than a year.

As the longest US expansion on record shows more signs of cooling, in part because of the fading effects of the 2018 fiscal stimulus, different parts of the world’s largest economy are giving mixed signals.

Disposable Incomes

The unemployment rate has fallen to a half-century low, underpinning consumers and keeping sentiment readings near historical highs. Today’s report showed disposable incomes after inflation increased an annualised 2.9 per cent after a 2.4 per cent pace in the prior quarter.

On the flip side, manufacturing, which makes up 11 per cent of the economy, has weakened further as a widely watched private gauge hit a 10-year low. Companies, including oil and gas exploration firms, have reined in capital outlays to preserve shareholder value.

The weakness in business investment was led by structures and equipment, which both dropped the most in more than three years. Structures contracted at a 15.3 per cent rate, shaving nearly a half a percentage point from growth, driven by a decrease in oil and gas exploration. Computers and aircraft led the decrease for equipment.

Personal consumption contributed 1.93 point while government added 0.35 point. Residential real estate contributed to growth for the first time since the end of 2017 amid lower mortgage rates, giving a 0.18 percentage point boost as the sector rebounded to a 5.1 per cent growth pace.

The Fed’s preferred underlying inflation measure, the personal consumption expenditures price index excluding food and energy, rose at a 2.2 per cent annual pace in the quarter, about in line with policymakers’ 2 per cent objective.