Outside the Beltway

Initial G.D.P. Reports Show Stronger Growth In The Summer

Initial reports for the third quarter show strong economic growth during the summer;

Doug Mataconis · Friday, October 28, 2016 · 19 comments

The first estimate of Gross Domestic Product growth for the third quarter shows the economy growing at a faster pace between June and September than it had for most of the year:

The American economy moved into a higher gear last quarter, expanding at an annual rate of 2.9 percent and riding continued strength among consumers and a better performance in global trade.

The Commerce Department’s report on the nation’s gross domestic product, released Friday, is the next-to-last snapshot of the overall economy before voters go to the polls on Nov. 8. Americans will also get to gauge the economic fortunes of the nation from the monthly unemployment figures to be released on Nov. 4.

While the pace of economic growth in the third quarter fell well short of previous achievements, the latest data represented a significant improvement from the first half of 2016. Economists also said the gains were probably strong enough to reassure Federal Reserve policy makers that it was safe to raise the benchmark interest rate when they meet in December.

“This is a good, solid number,” said Gus Faucher, deputy chief economist at PNC Financial Services in Pittsburgh. “The economy is growing at a decent clip. Consumer spending will continue to lead growth, and the fundamentals there remain positive.”

For all the quarterly blips, the ups and downs on Wall Street and the back and forth between political parties, the American economy remains largely on the same trajectory since the recovery began more than seven years ago: slow but consistent growth.

The bigger picture has remained remarkably steady since the start of the recovery, with yearly growth in the range of 1.75 percent to 2.75 percent. From 2010 to 2015, the economy grew at an average annual rate of 2.6 percent.

Economists like Michael Gapen of Barclays expect gross domestic product to expand 2.5 percent in the current fourth quarter, and then advance about 2 percent in 2017.

“The consumer is fine, and there is evidence that the industrial side of the economy is stabilizing and the big drags from inventories and weak investment are abating,” said Mr. Gapen. “Manufacturing, trade and energy may no longer be significant headwinds, as they have been over the last year.”

The 1.1 percent growth rate from January to June this year was the slowest first half since 2011, and it was well below what economists expected when 2016 began.

Much of that weakness was a result of an inventory buildup on store shelves and in warehouses that has only slowly been worked off. The lingering effects on business investment from the collapse in the price of oil and other commodities have also dragged down the economy.

Many experts initially forecast another subdued performance in the third quarter, but estimates crept higher this week after a report on Wednesday showed better-than-expected exports and lower imports in September.

Unlike some recent periods, which showed uneven gains, the growth in the third quarter was broad-based, with most industries advancing steadily. For the second quarter in a row, trade was a net positive, adding nearly a full point to growth on a big jump in exports.

Consumer spending slowed from its barnburner pace earlier in the second quarter, but at 2.1 percent it was healthy enough to suggest that shoppers remained optimistic. Other sources of slack, like a drop in spending on residential construction, were more than made up by businesses as they restocked shelves and began investing again in the energy industry and elsewhere.

The recent rebound in oil prices could spur more economic activity among drillers and other energy producers in the months ahead.

The Wall Street Journal has more:

WASHINGTON—U.S. economic growth accelerated last quarter, easing fears of a near-term slowdown but doing little to change the trajectory of a long but weak expansion.

Gross domestic product, a broad measure of goods and services produced across the economy, expanded at an inflation- and seasonally adjusted 2.9% annual rate in the third quarter, the Commerce Department said Friday. That was stronger growth than the second quarter’s pace of 1.4%. Economists surveyed by The Wall Street Journal expected growth at a 2.5% pace for the July-to-September period.

Last quarter’s growth rate was the fastest recorded in two years.

The third-quarter acceleration largely reflected increased exports and a buildup of inventories, while consumer spending increased at a slower rate.

The latest data “do not point towards a new growth path but rather a strong rebound following one year of soggy growth,” said Joseph Brusuelas, chief economist at consulting firm RSM US.

Friday’s data also gave voters their last comprehensive look at the economy’s health before the November election.

The improvement could give Democratic presidential nominee Hillary Clinton more latitude to position herself as the candidate to continue Obama administration policies that have led to a long expansion. Still, the most recent gain comes in the weakest expansion in recent memory, a point Republican candidate Donald Trump makes frequently.

Since the recession ended in mid-2009 the economy has grown at roughly a 2% annual rate, making the current expansion the weakest on records back to 1949.

(…)

The latest data suggests the economy this year isn’t likely to top 2015’s 2.6% growth rate, the best annual reading of the expansion. The economy has failed to grow better than a 3% in any year since 2005, and many economists expect such growth will remain a rarity. The nonpartisan Congressional Budget Office projects GDP to grow at around 2% annually through 2026. Federal Reserve policy makers have pegged longer-run output gains at a 1.8% annual rate.

And while output advanced at a quicker rate last quarter, hiring was also stronger than in the second quarter. That could restrain improvement in worker productivity. Worker productivity has decreased for three straight quarters, through the midpoint of this year, and has been weak for much of the expansion. Productivity is a key ingredient in determining future growth in wages, prices and overall economic output.

Friday’s report showed inflation pressures eased during the summer.

The price index for personal-consumption expenditures rose at a 1.4% seasonally adjusted annual rate in the third quarter from the second. Consumer prices rose at a 2% rate during the second quarter. When excluding volatile food and energy costs, the price index increased at a 1.7% rate in the third quarter.

One caveat, of course, is that this is only an initial estimate and that we won’t have a completely clear picture of what the economy looked like during the third quarter until the second revision next month and the final revision at the end of the year. Since these revisions typically aren’t massive, though, it’s still likely that the figures for the third quarter will remain roughly where they are by the time the Commerce Department has completed its final estimate. What this means for the fourth quarter is unclear, of course, but the fact that economic activity during this period will include both the closing month of the Presidential campaign and the holiday season suggests that we may see another quarter of stronger growth than we saw during the first half of the year. Additionally, it’s unclear if the stronger economic growth reflected in these numbers is really having an impact for the average person, something that has been shown most of all in the jobs reports for the past several months. While June and July’s reports both showed solid growth in new jobs, August and September’s reports were anemic at best, and the average job growth of roughly  178,000 new jobs for months for the year is barely enough to cover increases in population and hardly constitutes robust growth in employment. Those same jobs reports have shown relatively weak growth in hours worked and average wages, suggesting little benefit for the average worker from the supposedly stronger economy.

The fact that this report is being released in the context of the closing two weeks of the Presidential campaign, of course, means that it is likely to be examined for what it means for the Presidential campaign. In all honesty, notwithstanding the fact that both this number and the unemployment figures that will be released next Friday are going to be closely examined by political pundits and ‘what it means’ will be a subject of debate between now and November 8th, I tend to doubt that most voters go into a voting booth saying to themselves “Well, GDP growth was X and Jobs Growth was Y, so I’m going to vote for (fill in the blank).” Instead, most voters will vote depending on what they feel like the economy is like based on their own circumstances. That’s one reason why voters in parts of the country where manufacturing used to be strong may be more responsive to some of the themes that Donald Trump has hit on during his campaign while people who are in parts of the country doing better than they were in 2008 are likely to be more responsive to Hillary Clinton’s arguments in favor of continuing with the policies of the Obama Administration. Additionally, at this point in the race the campaigns are, or at least should be, primarily concerned with making sure the people they know will support them to the polls than with trying to persuade voters to switch candidates. That’s not to say that today’s number isn’t important, or that a weak or strong jobs number next week won’t be important. Today’s report arguably robs Trump of at least part of his argument about a weak economy unless you believe his hard-to-believe promise that his plans would lead to consistent quarters of economic growth at 4% higher, something that we haven’t seen consistently since the 1990s and the 1980s respectively.

The other question, of course, is what this means for Federal Reserve policy going forward. The next meeting of the board is next week just prior to the election and, notwithstanding this report and whatever other data the Board may have access too, it’s anticipated that they will refrain from taking any action if only to avoid being seen as attempting to influence the election one way or the other. The next meeting after that, though, comes in December and it seems likely that they will raise rates at that time just as they did last December. Once again, even with some relatively strong economic data like this it’s hard to see exactly why it’s so important to raise rates when the data is only showing the slightest signs of strong growth and there are few, if any, signs of inflation returning. If anything else, such an increase risks slowing growth just when things are starting to turn around rather than waiting to see if the future data justifies such a move.