Final Report Shows Tepid Economic Growth During Third Quarter
The final report on economic growth during the third quarter of the year shows that economic growth was tepid over the summer, information which raises questions about Federal Reserve policy and the impact of the economy on the 2016 elections going forward:
The government revised its estimate of economic growth in the third quarter down slightly on Tuesday, as inventory adjustments and weaker spending by businesses offset still-healthy consumer activity.
At an annualized rate of 2 percent, the pace of growth in the third quarter isn’t too far out of line with the tepid gains registered since the recovery began in mid-2009. Last year, the United States economy — as measured by thegross domestic product — grew by 2.4 percent; in 2013, it expanded at a 1.5 percent rate.
Economists had expected third-quarter growth to be revised slightly downward to an estimated rate of 1.9 percent.
After a big buildup of goods in warehouses and on shelves in the first half of 2015, inventories proved to be a headwind in the third quarter. Businesses have also been cautious about spending, while plunging oil prices have prompted energy companies to cut back on new investments.
Economists expect the growth rate in the current fourth quarter to be similar to that of the third quarter, with the economy’s overall rate of expansion for 2015 expected to be just over 2 percent.
One major source of weakness recently has been the strong dollar, said Torsten Slok, chief international economist for Deutsche Bank Securities in New York.
The dollar’s rise hurts American companies by making American exports more expensive for overseas buyers. At the same time, the picture for growth in both Asia and Europe remains cloudy.
“Employment has been holding up but the big economic story has been downward pressure from a strong dollar,” Mr. Slok said. “And the rest of the world, unfortunately, is still weak.”
Indeed, last week’s interest rate increase by the Federal Reserve, which came as some other central banks overseas were maintaining more accommodative monetary policies, could cause further gains in the dollar.
Still, the less-than-sizzling headline numbers belie the strength of many sectors in the United States.
Consumer demand, which accounts for nearly 70 percent of economic activity, has been rising at a rate of roughly 3 percent. Similarly, employers continue to hire at a steady pace and average hourly earnings are showing signs of life after years of stagnation.
More from The Wall Street Journal;
WASHINGTON—The U.S. economy expanded at a slightly slower pace than initially estimated in the third quarter, as companies spent less stockpiling their inventories.
Gross domestic product, the broadest measure of goods and services produced across the economy, advanced at a 2.0% seasonally adjusted annual rate in the third quarter, the Commerce Department said Tuesday. The agency last month had estimated third-quarter GDP growth of 2.1%.
Economists surveyed by The Wall Street Journal estimated the latest revision would show 1.9% growth.
The July through September reading marks a sharp slowdown from the second quarter’s 3.9% rate of expansion, reflecting the drag from inventory drawdown and a deceleration in consumer and business spending.
The reading suggests 2015 is on track to close out another year of steady if unspectacular growth, bolstered by a firming job market, strong home sales and pockets of wage increases. But headwinds remain: Despite low gasoline prices, consumer spending has been muted throughout the year. Weakness in overseas economies, a strong dollar and low oil prices have weighed on the manufacturing, mining and energy sectors at home, damping business investment and exports and causing thousands of layoffs.
The median projection from Fed officials as of December was for GDP to grow 2.1% this year and 2.4% in 2016.
Tuesday’s revisions showed a larger drag from private inventories than had been previously estimated, as companies let their stockpiles dwindle. But the underlying details point to steady domestic demand.
Consumer spending grew at an unrevised 3.0% annual rate, contributing 2.04 percentage points to the quarter’s 2.0% growth rate.
A breakout in consumer spending in the world’s largest economy could help spur growth in the face of slowing demand outside the U.S., but many consumers feel constrained thanks to modest wage growth and rapidly rising costs for essentials like shelter and medical care. Household spending on services rose at a 2.1% pace, with health care outlays alone accounting for 0.4 percentage points of the quarter’s GDP growth.
Much of the discretionary spending this year has been on big-ticket items like cars, homes and furniture. With the Federal Reserve likely to gradually ramp up short-term interest rates next year, these kinds of large purchases, usually paid for in installments, may become more expensive.
Prior to this, the initial report on economic growth during the period form June to September had come in at a disappointing 1.5% annualized growth, which was revised upward to 2.1% in the revision released at the end of November. This downward revision, then, isn’t too substantial but still reflective of the fact that growth during the summer was not exactly spectacular even if the there were some positive signs moving forward. Among the most positive of those signs was the fact that consumer spending, which has long bee the workhorse of the economy, was growing at a solid 3.0% rate, a number confirmed in this report that suggests that increased spending in the fourth quarter in anticipation of and during the holidays could lead to a slightly better report for the fourth quarter. While the Journal does note that the Federal Reserve’s decision to increase rates could have an impact on spending for some items such as cars that are dependent on interest rates, that impact is more likely to be felt going forward in 2016 than in any reports we get for the last three months of 2015 since it will take time for the full impact of the rate increase to be reflected in the rest of the economy and because the rate increase will only have been in place for the final two weeks of the year. In the short term, the look forward for 2016 will likely also be impacted strongly by the weather given the fact that the last several years have shown a correlation between severe weather during the first quarter of the year and lower, or even negative, economic growth. So far, the weather on the East Coast and in the Midwest has been somewhat milder than in previous years, something that could have a positive impact on the economy both as the fourth quarter winds down and the New Year begins, but as we’ve seen before that can change quickly.
Going forward, of course, the economy is likely to become an important issue for several respects. First of all, the Federal Reserve, along with analysts and investors, will be watching economic statistics closely to see what, if any impact, the recent rise in interest rates may end up having on economic growth, business spending, and consumer spending. Depending on what these numbers tell them, we either may or may not be seeing further interest rate increases as the months go on. Additionally, while the past month has seen the race for the White House focused mostly on national security and terrorism issues, it is inevitable that we’ll see a return to focus on economic issues at some point. If it appears that the economy is stalling or heading downward, Republicans are likely to hit Democrats and emphasize policies that they believe will stimulate economic growth. Democrats, on the other hand, will want to emphasize continuing the policies of the Obama Administration which, they contend, are largely responsible for a recovery that has lasted some six years now. This suggests that the Federal Reserve will end up getting stuck in the middle between the two parties, with both arguing that it is engaging in policies that are having a negative impact on the economy, although for different reasons. In any case, we can count on the candidates and the political pundits paying a lot more attention to economic statistics going forward.
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