WASHINGTON (Reuters) – The US economy slowed down less than expected in the third quarter when a tariff-related decline in soybean exports was partially offset by the strongest spending spending for almost four years, keeping growth on track to hit the Trump Administration 3 percent target this year.
Gross domestic product increased by 3.5 percent annual interest rate also supported by an increase in inventory investments and solid public spending, the trade department said Friday in its first estimate of GDP growth in the third quarter.
While there was a decline from a 4.2 percent pace in the second quarter, the growth potential of the economy, which the economists set about 2 percent, still exceeded. But it was the red flag for the economic expansion that is now in its ninth year and the second longest on record.
Corporate spending stopped and housing investment declined for a third straight quarter, indicating that the increase from a $ 1[ads1].5 billion tax was fading and higher interest rates cut the housing market.
"There is a day of calculation for the economy after the tax cuts are gone, but for today, Washington really has something to worry about," said Chris Rupkey, chief economist at MUFG in New York.
Economists polled by Reuters had forecasted GDP expands by 3.3 percent pace in the third quarter. The fiscal stimulus is part of measures adopted by President Donald Trump's administration to increase annual growth to 3 percent on a sustainable basis.
However, the government is also locked in a bitter trade war with China, as well as trade conflicts with other trading partners, and the decline in the fourth quarter largely reflected the effect of Beijing's retaliatory tariffs on American exports, including soybeans.
Farmers shipped shipments to China before tariffs came into force at the beginning of July, increasing growth in the second quarter. Since then, exports of soya have been exported every month, which increases trade deficit. There was also a decline in exports of petroleum and non-automated capital goods.
However, strong domestic demand sucked into consumer goods and motor vehicles. The growing trade gap fell by 1.78 percentage points from GDP growth in the third quarter. It was most since the second quarter of 1985 and reversed the contributions of 1.22 percentage points in the April-June period.
The decline in imports also reflected a rush of companies to the warehouse before US import taxes, mainly on Chinese goods, came into force late in the third quarter.
Imports derive from GDP growth. However, some of the imports probably ended up in stock and created stocks of stock, which contributed to GDP.
Stocks increased by $ 76.3 billion after falling in $ 36.8 billion in the second quarter.
As a result, inventory investment increased 2.07 percentage points to GDP growth, the largest contribution since the first quarter of 2015, after cutting out 1.1 percentage points from production in Q2.
ROBUST CONSUMER SPENDING
"Trade policy can also have driven the major fluctuations in net exports and stocks," said Michael Feroli, an economist at JPMorgan in New York. "This dynamic can continue into the fourth quarter."
Apart from the impact of trade and inventories, GDP grew 3.1 percent in the third quarter, compared with a 4.0 percent pace in April-June.
The dollar rose short to a two month high against a basket of currencies on the data.
Stocks on Wall Street traded lower after Amazon ( AMZN.O ) gave a sub-season for sales time and the Google parent letter ( GOOGL.O ) reported quarterly earnings that missed analysts' estimates. US government bonds fell.
Solid growth in the third quarter is expected to keep the Federal Reserve at a rate to raise interest rates again in December, despite a recent tightening in financial market conditions as a result of listed trading and an increase in US Treasury yields.
The Fed raised prices in September for the third time this year and removed a reference to monetary policy remaining "accommodative" from its policy statement.
The GDP report showed Fed's preferred inflation meter, the personal consumer price index (PCE) excluding food and energy, increased by 1.6 percent in the third quarter. The core PCE price index rose 2.1 percent in the April-June period.
Consumer spending, which accounts for more than two thirds of US economic activity, increased 4.0 percent in the third quarter. It was the fastest pace since the fourth quarter of 2014, followed by an increase of 3.8 per cent in the second quarter.
Momentum is expected to slow, however, as wage growth remains gradual, despite the fact that unemployment is close to a 49-year low of 3.7 per cent. In addition, the stock market's turmoil seeks to reduce household wealth.
Equipment expenses increased by 0.4 percent, the slowest for two years, having increased by 4.6 percent in the second quarter. Companies struggling to find workers and import tariffs increase production costs for companies such as Caterpillar Inc ( CAT.N ), 3M Co ( MMM.N ) and Ford Motor Co. ().
"It seems that most business executives have become a little cautious in the future and stay out of committed to major investment plans," said Joel Naroff, CFO at Naroff Economic Advisors in Holland, Pennsylvania.
The housing market was at its steepest pace for more than a year in the third quarter, and also diminished the economy's outlook.
Reporting of Lucia Mutikani; Editing Tomasz Janowski and Andrea Ricci