Third-quarter GDP cools a bit to a still-solid 3.5% rate


Bloomberg News/Landov

Consumer spending, which makes up about 70% of gross domestic product, continues to be prime driver of output.

The numbers: Gross domestic product decelerated a bit to a 3.5% annual pace in the third quarter, down from torrid 4.2% pace in the prior three months, the government said Friday. GDP is the official measuring stick for the U.S. economy. The gain was very close to Wall Street estimates. Economists polled by MarketWatch had GDP would rise at a 3.4% rate. Growth in the last two quarters is the fastest six months of growth in four years. The economy looks like it will expand above a 3% rate in 2018. That hasn’t happened since 2005. At the same time, inflation cooled in the third quarter.

What happened: Consumer spending rose 4% in the third quarter, even stronger than the prior three months. This was offset by a slowdown in business and residential investment. Household investment has fallen for three straight quarters.

The value of unsold goods, or inventories, added 2.1 percentage points to growth. A significantly larger trade deficit took 1.8 points off top-line growth.

Final sales to private domestic purchasers, a good measure of domestic demand that excludes inventories and trade, rose 3.1%, down from 4.3% in the prior three months.

Government spending picked up, expanding 3.3% after a 2.5% gain in the second quarter.

Inflation as measured by the PCE price index, meanwhile, rose at a 1.6% annual rate in the third quarter, down from a 2% rate in the prior quarter. The core PCE price index rose at a 1.6% annual rate, down from a 2.1% rate in the second quarter.

Big picture: The second quarter might have been the peak quarterly growth rate of this business cycle because it was when the biggest impact of the Trump tax cuts hit the economy. But growth remains at a solid clip. The third quarter is the second-fastest pace in four years, after the previous quarter’s torrid pace.

And economists are forecasting close to a 3% growth rate for the fourth quarter. The outlook for 2019 is less certain.

President Donald Trump seems to be preparing for slower growth next year, already blaming the Federal Reserve for any slowdown.

For his part, Fed Chairman Jerome Powell has made clear he wants to keep raising rates at a gradual pace, widely defined as a quarter-point increase every three months. That would put the next move in December. The inflation data suggest Powell can keep moving at this pace. Only a small minority at the Fed wants the central bank to pause. The president doesn’t have a vote.

Market reaction: U.S. stocks were under pressure after disappointing results for Amazon

AMZN, +7.09%

The Dow Jones Industrial Average

DJIA, +1.63%

rebounded almost 400 points on Thursday after steep losses during the previous day’s trading.

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