It's the boom economy, stupid: Q3 GDP growth at 3.5%

If “It’s the economy, stupid” applies as strongly to the midterms as Republicans hope, they just got good news from the Commerce Department. For the first time in more than three years, the US economy grew at an annualized rate of 3% in GDP in two successive quarters. The third quarter expansion measured 3.5% following Q2’s 4.2%:


Real gross domestic product (GDP) increased at an annual rate of 3.5 percent in the third quarter of 2018 (table 1), according to the “advance” estimate released by the Bureau of Economic Analysis. In the second quarter, real GDP increased 4.2 percent. …

The increase in real GDP in the third quarter reflected positive contributions from personal consumption expenditures (PCE), private inventory investment, state and local government spending, federal government spending, and nonresidential fixed investment that were partly offset by negative contributions from exports and residential fixed investment. Imports, which are a subtraction in the calculation of GDP, increased (table 2).

The deceleration in real GDP growth in the third quarter reflected a downturn in exports and a deceleration in nonresidential fixed investment. Imports increased in the third quarter after decreasing in the second. These movements were partly offset by an upturn in private inventory investment.

The BEA chart shows the dynamism of the result:

Consumer spending had its best quarter in almost four years, with PCE growth at 4%, up from last quarter’s 3.8%. If consumer confidence remains high, business confidence is out of this world, with a 12% leap in private domestic investment. The biggest growth category was intellectual property, but there was a little bit of inventory expansion the numbers too, as final sales to domestic purchasers lagged slightly at 3.1%.

On the negative side, the trade balance looks seriously off in Q3. Last quarter, exports grew at a rapid 9.3% pace while imports tailed off at -0.6%. This time, imports grew at a 9.1% rate while exports dropped more dramatically to -3.5%. Business investment seems to have saved the quarter, but that may not last long unless those trade numbers get back into better balance.


For now, though, the economy keeps demonstrating sustained growth and strength, exhibiting more dynamism than Donald Trump’s critics argued was possible. The Associated Press’ Martin Crutsinger reports that the GDP growth beat expectations for the quarter:

The Commerce Department said Friday that the third quarter’s gross domestic product, the country’s total output of goods and services, followed an even stronger 4.2 percent rate of growth in the second quarter. The two quarters marked the strongest consecutive quarters of growth since 2014.

The result was slightly higher than many economists had been projecting. It was certain to be cited by President Donald Trump as evidence his economic policies are working. But some private economists worry that the recent stock market declines could be a warning signal of a coming slowdown.

The GDP report along with next week’s unemployment report for October are the last major looks at the economy before voters go to the polls in the mid-term elections.

CNBC points out that inflation was surprisingly tame, too:

The U.S. economy grew at a faster-than-expected rate in the third quarter as inflation was kept in check and consumer spending surged, according to data released by the Commerce Department on Friday.

Gross domestic product expanded by a 3.5 percent annual rate. Economists polled by Dow Jones expected the economy to expand by a 3.4 percent annual rate.

The department said the PCE price index, a key measure of inflation, increased by 1.6 percent last quarter, much less than the 2.2 percent increase expected by economists polled by StreetAccount.


That’s good news on both Wall Street and Main Street. If inflation remains tame while the economy sustains this level of growth, the Fed will likely stay on the sidelines for a while. That will give the Trump administration some breathing room on interest rates, and perhaps prompt potential homeowners into picking up the pace on purchases over the next few months.

Assuming a maintenance level or better job-creation rate in next Friday’s jobs report, Republicans have about the best economy possible heading into the midterms. Will voters really want to change course back to pre-2017 policies by putting Democrats in charge of Congress? The above chart should be Exhibit A for every Republican in every House district between now and the election on November 6th.

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David Strom 6:40 PM | April 18, 2024