Thursday, July 19, 2018
Business

U.S. economy grew at its strongest pace in two years

WASHINGTON — Don't expect much more from the U.S. economy this year — it may have already peaked.

Gross domestic product, the broadest measure of economic health, grew at annual rate of 2.9 percent in the July-September quarter, shaking off a lackluster first half and accelerating to its strongest growth in two years, the Commerce Department reported Friday. The improvement was powered by a rebound in exports and a decision by businesses to restock their shelves.

The latest figure was double the 1.4 percent rate in the second quarter. The details, however, point to signs that the pace is unlikely to last.

The rise in exports was fueled by a surge in shipments of soybeans to South America. That's probably not going to happen again. The strength in inventory rebuilding also looks to fade in coming quarters.

Moreover, consumer spending growth slowed from a breakneck pace in the second quarter. Business investment was barely positive, still trying to recover from sharp cutbacks in the energy industry after oil prices plunged. Home construction also contracted for a second quarter, although economists believe that setback will be temporary.

Gregory Daco, head of U.S. Macroeconomics at Oxford Economics, said the third-quarter results "may be as good as it gets in 2016." He forecasts slower growth of around 2 percent in the current October-December period.

"Going forward, we expect a modest expansion in economic activity, but we note the economy may be in a fragile equilibrium," Daco wrote in a research note.

Still, the better-than-expected GDP reading for the third quarter keeps the Federal Reserve on track to boost interest rates next month. Economists believe a rate hike at next week's meeting is unlikely so close to the U.S. presidential election.

Paul Ashworth, chief U.S. economist at Capital Economics, said that the report "confirms that the economic recovery has regained some of the momentum lost within the last year."

The Commerce Department report was the government's first look at third-quarter GDP. It will be subject to two revisions over the next two months. It represents one of the last major economic reports to be issued before American voters go to the polls on Nov. 8.

Democrats hailed the GDP rebound after three straight quarters of anemic growth averaging around 1 percent. But Republicans said the new figure did not change their view that the country's current policies need to be changed.

"Growth hasn't risen above 3 percent for a full year in any year of the Obama presidency," said Dan Kowalski, deputy policy director for the Trump campaign. "The single most important issue facing the American people is an economy that has failed to deliver jobs, incomes and opportunity."

GDP growth slumped into a pronounced slowdown late last year. Exporters were constrained by a rising dollar, which made their products more expensive on overseas markets. Businesses cut back on boosting inventories in the face of weaker sales.

Given the disappointing first half, economists believe growth for the entire year will be a modest 1.6 percent. The economy grew 2.6 percent for all of 2015. This recovery from the deep 2007-2009 recession has been the weakest in the post-World War II period, with growth averaging around just 2 percent over the past seven years.

The GDP growth rate in the third quarter was the economy's best showing since it expanded at a 5 percent rate in the third quarter of 2014. In the final three months of last year, growth slowed to a 0.9 percent rate, followed by weak gains of 0.8 percent in the first quarter this year and 1.4 percent in the second quarter.

Exports in the third quarter rose at a 10 percent rate. That was the fastest pace since late 2013. A narrowing trade deficit added 0.8 percentage points to growth.

Stronger inventory building added 0.6 percentage point to growth after trimming it by 1.2 percentage points in the second quarter.

Consumer spending, which accounts for two-thirds of economic activity grew at a solid 2.1 percent rate but slower than the 4.1 percent spending burst in the second quarter.

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