WASHINGTON WASHINGTON (Reuters) – US economy likely slowed further in Q3, restrained by a moderation in consumer spending and declining business investment, which could spur the Federal Reserve to cut interest rates again to hold expansion in a course.
The Department of Commerce's snapshot of gross domestic product on Wednesday is likely to draw a picture of an economy that is slowing but not tipping into the recession as financial markets had feared earlier this year. The economy is hampered by the Trump administration's 1[ads1]5-month trade war with China, which has eroded consumer and business confidence.
The fading stimulus from last year's $ 1.5 trillion tax cut package and slowing growth abroad also shrinks the longest economic expansion on record, now in its 11th year.
The GDP report will be published hours before Fed officials hold a two-day political meeting. The US central bank is expected to cut interest rates for the third time on Wednesday. The Fed cut interest rates in September after reducing borrowing costs in July for the first time since 2008.
"A continuing loss of momentum that not only justifies previous measures taken by the Fed, but continues the need for further political stimulus to offset a continuing downward trend in domestic activity," said Lindsey Piegza, chief economist at Stifel in Chicago.
Gross domestic product probably increased by an annual rate of 1.6% in the third quarter, also due to a smaller stock build-up, according to a Reuters survey of economists, after rising by 2.0% in the April-June period .
The trade deficit was probably less than the GDP growth last quarter. However, the gap was likely to be reduced because the flow of goods was limited by import duties and slowed global growth to levels that economists said suggested a further loss of speed in domestic activity.
The projected growth rate in the third quarter would mark a further deceleration from the 3.1% rate logged in the first quarter, indicating that the economy will again miss the White House's ambitious target of 3.0% annual growth. Growth peaked in the second quarter of 2018, when it was shaken by tax cuts and increased defense spending.
The economy grew 2.9% in 2018 and growth this year is expected to be below 2.5%. Economists estimate the rate at which the economy can grow over a long period without igniting inflation of between 1.7% and 2.0%.
While President Donald Trump this month announced a ceasefire in the trade war with China, delaying further tariffs to occur in October, economists say growth is still in danger without all tasks being rolled back. A Trump administration official said Tuesday that the interim trade agreement may not be ready to sign in Chile next month as expected.
"The interim trade agreement with China is really a stop-gap measure," said Sung Won Sohn, a business economist at Loyola Marymount University in Los Angeles. "Trump, who is facing a tough reelection campaign, wants to show some progress, and China needs to boost its economy. The real hard work is ahead of us."
The GDP report is also expected to show faster inflation in the last quarter, although the general trend is likely to remain moderate.
Consumer spending growth, which represents more than two-thirds of US economic activity, is expected to have slowed after a 4.6% increase in the second quarter, the fastest since the fourth quarter of 2017.
Despite the lowest unemployment rate of nearly 50 years, which has driven consumption, some economists are beginning to question consumer resilience after retail sales fell for the first time in seven months in September. Consumer confidence has tended to be lower, and wage growth continues.
"If consumer spending misses a ceiling in the fourth quarter, there is little other support for the economy to fall back on," said Scott Anderson, chief economist at Bank of the West in San Francisco.
Business investment probably fell further after falling most at 3-1 / 2 years in the second quarter. In addition to trade tensions, which have weighed in on investment costs, cheaper oil has undercut consumption on oil and gas drilling.
Design problems at the aviation giant Boeing ( BA.N ) have also damaged industrial investment, with some transition to export. The world's largest planner last week reported a 53% decline in quarterly earnings due to ground support for the top-selling 737 MAX jets. The planes were withdrawn in March after fatalities in Indonesia and Ethiopia.
The trade deficit was probably reduced in relation to the April-June quarter. However, economists see the shrinking deficit as masking the underlying weakness of the economy.
"US trade volume is declining and declining global growth, and US trade policy is probably behind this," said Michael Gapen, chief economist at Barclays, New York.
Gapen noted that the fall in trading volume was approaching levels seen during the industrial recession of 2015-16, which he said "suggests the potential for further deceleration in US activity." Trade drew 0.68 percentage points from GDP growth in the second quarter.
The company probably accumulated inventories at a measured pace in the last quarter after building stocks at a price of $ 69.4 billion in the April-June period. Inventories slid 0.91 percentage points from GDP growth in the second quarter.
The slower stock is also a factor in weak production. Government spending is thought to have cooled after rising at its fastest pace of 10 years in the second quarter. Consumption of home construction is likely to decline after contracting for six straight quarters.
(Reporting by Lucia Mutikani; Editing by Andrea Ricci)