Concerns over the economic impact of a series of natural disasters in the third quarter appear to have been exaggerated. The US economy grew at an annualized rate of 3.0% in today’s advance estimate for Q3. Combined with Q2’s 3.1% growth rate, the US has had its best back-to-back performance since 2014:
Real gross domestic product (GDP) increased at an annual rate of 3.0 percent in the third quarter of 2017 (table 1), according to the “advance” estimate released by the Bureau of Economic Analysis. In the second quarter, real GDP increased 3.1 percent. …
The increase in real GDP in the third quarter reflected positive contributions from personal consumption expenditures (PCE), private inventory investment, nonresidential fixed investment, exports, and federal government spending. These increases were partly offset by negative contributions from residential fixed investment and state and local government spending. Imports, which are a subtraction in the calculation of GDP, decreased (table 2).
The deceleration in real GDP growth in the third quarter primarily reflected decelerations in PCE, in nonresidential fixed investment, and in exports that were partly offset by an acceleration in private inventory investment and a downturn in imports.
There are a couple of caveats to this. First, as with any advance estimate, the numbers can change significantly when more data comes into the BEA. More specifically, the numbers for personal consumption expenditures (PCEs) slipped downward again, falling from 3.3% in Q2 to 2.4% in Q3. Durable goods purchases continued on its almost-uninterrupted 18-month tear with an increase of 8.3%, but nondurable goods only grew 2.1% and services growth dipped to its lowest level since 2016Q1 at 1.5%.
On the plus side, the US export figures look good, but also lower than in Q2, down from 3.5% growth to 2.3% in Q3. The impact is greater because of a decline in imports, which fell from 1.5% growth last quarter to -0.8 overall, and -2.1% in imported services. That helps the trade balance and makes the GDP look better, but it might indicate a slowing of demand, especially with the slowdown in PCEs.
Inventory growth might be another warning sign. Final sales of domestic product grew at a slower rate of 1.8% than the overall economy, and the BEA does credit inventory expansion for part of the overall Q3 growth number. Businesses are expanding inventories for holiday sales, so this is expected and would be tempered to some extent by seasonal adjustments. That gap between final sales and overall GDP suggests that the US economy may be borrowing from future growth, so to speak, in this quarter.
Overall, though, one has to consider this a “touchdown,” as CNBC’s panel says, given all of the disasters that hit the US in this period. However, Reuters also notes the potential land mines ahead:
The U.S. economy unexpectedly maintained a brisk pace of growth in the third quarter as an increase in inventory investment and a smaller trade deficit offset a hurricane-related slowdown in consumer spending and a decline in construction. …
Harvey and Irma struck parts of Texas and Florida in late August and early September. Hurricane Maria, which destroyed infrastructure in Puerto Rico and the Virgin Islands, had no impact on third-quarter GDP growth as the islands are not included in the United State’s national accounts.
Economists polled by Reuters had forecast the economy growing at a 2.5 percent pace in the third quarter. Excluding inventory investment, the economy grew at a 2.3 percent rate, slowing from the second quarter’s 2.9 percent pace.
On the other hand, the rebuilding efforts will largely come in Q4, the AP’s Martin Crusinger reminds us, which may mean a boost depending on how fast it takes place:
For all of 2017, private forecasters believe the economy will grow at an annual rate of around 2.2 percent, rising to growth of 2.4 percent in 2018. That would be an improvement from the meager gain of 1.5 percent in 2016 but would still fall below the expectations of the Trump administration.
Harvey made initial landfall in Texas on Aug. 25, and Irma hit Florida on Sept. 10. The government said while various activities from oil and gas refineries in Texas to farming in Florida were affected, it could not break out an estimate of how much the hurricanes had decreased growth.
However, private economists have estimated that the storms sapped anywhere from one-half percentage point to 1 percentage point from growth. Analysts believe much of the lost output will recover as rebuilding begins.
Watch the PCEs and the demand numbers in the interim and final estimates. If they don’t pick up, Q4 may wind up dragging more than expected. For now, though, the Trump administration has some bragging rights on a surprisingly good overall result.