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US economic growth slows in third quarter as businesses cut back US economic growth slows in third quarter as businesses cut back
(about 3 hours later)
US economic growth braked sharply in the third quarter as businesses cut back on restocking warehouses to work off an inventory glut, but solid domestic demand could encourage the Federal Reserve to raise interest rates in December. US economic growth cooled in the third quarter despite a pick-up in consumer spending as a glut on inventory led to businesses cutting back on restocking warehouses.
Gross domestic product increased at a 1.5% annual rate after expanding at a 3.9% clip in the second quarter, the Commerce Department said on Thursday. The inventory drag, however, is likely to be temporary and economists expect growth to pick up in the fourth quarter given strong domestic fundamentals. Gross domestic product (GDP) – the broadest measure of economic health – increased at a 1.5% annual rate, a significant drop from the 3.9% annual growth of the second quarter, the Commerce Department said on Thursday. The main drag came from businesses stockpiling inventory, however, and economists expect growth to improve in the fourth quarter.
Related: Federal Reserve keeps interest rates unchanged but hints at December riseRelated: Federal Reserve keeps interest rates unchanged but hints at December rise
The Fed on Wednesday described the economy as expanding at a “moderate” pace and put a December rate hike on the table with a direct reference to its next policy meeting. The US central bank has kept benchmark overnight interest rates near zero since December 2008. “Although the headline number of 1.5% growth was a big weaker than expected, the details were quite good. Demand from US consumers, businesses and governments remains solid, as does demand for US-produced goods and services, both domestically and from abroad. The big drag was from inventories, but that will quickly fade, and growth should pick back up in the fourth quarter,” said PNC chief economist Stuart Hoffman.
Consumer spending, boosted by cheaper gasoline and firming housing and labor markets, grew at a 3.2% rate after expanding at a 3.6% pace in the second quarter. Consumer spending accounts for two-thirds of US GDP.
The latest GDP figures come as the Federal Reserve is weighing its first increase in interest rates since 2008. Announcing plans to keep interest rates at their record low on Wednesday, the Fed said “economic activity has been expanding at a moderate pace”. The latest GDP figures add little to the debate over whether the central bank will raise rates at its next meeting in December, said Paul Ashworth, chief US economist at Capital Economics.
“As far as the Fed is concerned, the next two employment and inflation reports will have a bigger impact on whether the Fed opts to hike interest rates in December or waits until early next year,” he wrote in a note to investors. “It’s a close call but, on balance, we still think the Fed will end up delaying until 2016.”
The economy has struggled to sustain a faster pace of growth since the end of the 2007-2009 recession, with average yearly growth failing to break above 2.5%. Economists had forecast GDP expanding at a 1.6% rate in the third quarter.The economy has struggled to sustain a faster pace of growth since the end of the 2007-2009 recession, with average yearly growth failing to break above 2.5%. Economists had forecast GDP expanding at a 1.6% rate in the third quarter.
Businesses accumulated $56.8bn worth of inventory in the third quarter, the smallest since the first quarter of 2014 and down sharply from $113.5bn in the April-June period. The small inventory build sliced off 1.44 percentage points from third-quarter GDP growth, the largest since the fourth quarter of 2012.Businesses accumulated $56.8bn worth of inventory in the third quarter, the smallest since the first quarter of 2014 and down sharply from $113.5bn in the April-June period. The small inventory build sliced off 1.44 percentage points from third-quarter GDP growth, the largest since the fourth quarter of 2012.
The blow from inventories was blunted by bullish consumers, who are getting a tailwind from cheaper gasoline and firming housing and labor markets.
Consumer spending, which accounts for more than two-thirds of US economic activity, grew at a 3.2% rate after expanding at a 3.6% pace in the second quarter. A measure of private domestic demand, which excludes trade, inventories and government spending, rose at a sturdy 3.2% pace.
Given a strong dollar, export growth decelerated in the third quarter. The drag was, however, offset by a slowdown in imports, leaving the impact from trade on GDP growth neutral.
Ongoing spending cuts in the energy sector also undermined growth. A plunge in oil prices has prompted oil field companies like Schlumberger and Halliburton to slash investment.Ongoing spending cuts in the energy sector also undermined growth. A plunge in oil prices has prompted oil field companies like Schlumberger and Halliburton to slash investment.
Schlumberger said this month it did not expect a recovery in demand before 2017 and anticipated that exploration and production spending would fall again in 2016. Schlumberger, the world’s largest oilfield services company, said this month it did not expect a recovery in demand before 2017 and anticipated that exploration and production spending would fall again in 2016.
Investment on nonresidential structures contracted at a 4.0% pace as spending on mining exploration, wells and shafts tumbled at a 46.9% rate. This category dropped at a 68% pace in the second quarter.Investment on nonresidential structures contracted at a 4.0% pace as spending on mining exploration, wells and shafts tumbled at a 46.9% rate. This category dropped at a 68% pace in the second quarter.
Despite strong domestic demand, inflation retreated because of dollar strength and cheaper gasoline.Despite strong domestic demand, inflation retreated because of dollar strength and cheaper gasoline.
The personal consumption expenditures (PCE) price index rose at a 1.2% rate after rising 2.2% in the second quarter. Excluding food and energy, prices increased at a 1.3% pace.The personal consumption expenditures (PCE) price index rose at a 1.2% rate after rising 2.2% in the second quarter. Excluding food and energy, prices increased at a 1.3% pace.