U.S. economy slows in third quarter

This is a decline from the 3.9 percent growth the economy saw in the second quarter of 2015. The drag from inventory, however, is unlikely to persist, and economists anticipate growth will pick up in the fourth quarter. Inventories of manufactured durable goods have fallen in four of the last five months, and new orders of durable goods were negative in August and September, according to the Census Bureau. “Private final demand, an indicator that represents sales to nongovernmental domestic purchasers, expanded by 3.2 percent in the third quarter”. The drag was, however, offset by a slowdown in imports, especially automobiles, leaving trade’s impact on growth neutral. A renewed decline in energy prices is also giving consumers more money to spend on other goods and services.

Indeed, the pluses and minuses buried in the details of Thursday’s report highlight the contradictions that economists, Federal Reserve policymakers and ordinary consumers all have to contend with after more than six years of tepid economic growth. “All things considered, we expect GDP growth of about 2.5% in the fourth quarter and in 2016 as well”.

“We continue to see the underlying net trade dynamics as indicating the potential for slower growth overseas to dampen headline USA growth going forward”, Barclays economist Jesse Hurwitz wrote in a note to clients before the data was released.

Of course, businesses didn’t reduce inventory levels because the economy is all peachy.

What’s fueled the upturn in spending are higher inflation-adjusted incomes, a residue of cheap gas.

The U.S. economy chilled down in the third quarter as companies held off on production to avoid an excess buildup in inventories, specifically of products for foreign markets.

The 3.2 percent annual rise in consumer spending in the third quarter was only slightly below the 3.6 percent growth rate in the second quarter.

Business investment growth cooled to a 2.1% rate in Q3, following a stronger 4.1% in Q2. The latter was something of a disappointment and is partly due to a much smaller 1.8% gain in intellectual property investment, down from 8.3% in the second quarter. Another area of strength was state and local government spending, which rose for the second straight quarter, up an annualized 2.6 percent in the third quarter. Job growth slowed, to less than 150,000 a month in September and October. The warehouse glut indicated most manufacturers opted to store raw materials instead of increasing industrial output, perhaps hoping for higher returns later as commodity prices weaken further.

The GDP report is pretty solid – but not spectacular – and it won’t change many minds about when the Federal Reserve should begin hiking interest rates.

The last time the Fed raised interest rates was in 2006, before pushing it down to 0.25 per cent in 2008 in reaction to the Great Recession.