Tags: atlanta | fed | growth | gdp | eocnomy

Atlanta Fed Sees US Growth at 2.6 Percent in Fourth Quarter

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Monday, 29 October 2018 02:30 PM

The U.S. economy is expanding at a 2.6 percent annualized rate in the fourth quarter, slower than the brisk pace in the previous quarter, the Atlanta Federal Reserve’s GDPNow forecast model showed on Monday.

This compared with a 3.5 percent growth pace for the third quarter the U.S. Commerce Department reported on Friday.

The next GDPNow update is Thursday, November 1.

The governmernt said Friday that the U.S. economy slowed less than expected in the third quarter as a tariff-related drop in soybean exports was partially offset by the strongest consumer spending in nearly four years, keeping growth on track to hit the Trump administration’s 3 percent target this year.

Gross domestic product increased at a 3.5 percent annualized rate also supported by a surge in inventory investment and solid government spending, the Commerce Department said on Friday in its first estimate of third-quarter GDP growth.

While that was a slowdown from a 4.2 percent pace in the second quarter, it still exceeded the economy’s growth potential, which economists put at about 2 percent. But there were red flags to the economic expansion that is now in its ninth year and the second longest on record.

Business spending stalled and residential investment declined for a third straight quarter, signs that the boost from a $1.5 trillion tax cut was fading and higher interest rates were hurting the housing market.

“There will come a day of reckoning for the economy after the tax cut monies are all gone, but for today Washington really has something to crow about,” said Chris Rupkey, chief economist at MUFG in New York.

Economists polled by Reuters had forecast GDP expanding at a 3.3 percent pace in the third quarter. The fiscal stimulus is part of measures adopted by President Donald Trump’s administration to boost annual growth to 3 percent on a sustainable basis.

Yet the government is also locked in a bitter trade war with China as well as trade disputes with other trade partners and the last quarter’s slowdown mostly reflected the impact of Beijing’s retaliatory tariffs on U.S. exports, including soybeans.

Farmers front-loaded shipments to China before the tariffs took effect in early July, boosting second-quarter growth. Since then, soybean exports have declined every month, increasing the trade deficit. There were also decreases in exports of petroleum and nonautomative capital goods.

Strong domestic demand, however, sucked in imports of consumer goods and motor vehicles. The widening trade gap chopped off 1.78 percentage points from GDP growth in the third quarter. That was the most since the second quarter of 1985 and reversed the 1.22 percentage points contribution in the April-June period.

The rebound in imports also reflected a rush by businesses to stockpile before U.S. import duties, mostly on Chinese goods, came into effect late in the third quarter.

Imports subtract from GDP growth. But some of the imports likely ended up in warehouses, adding to the stockpile of inventory, which contributed to GDP.

Inventories increased at a $76.3 billion rate after declining at a $36.8 billion pace in the second quarter.

As a result, inventory investment added 2.07 percentage points to GDP growth, the biggest contribution since the first quarter of 2015, after slicing off 1.1 percentage points from output in the second quarter.

“Trade policy may also have driven the big swings in net exports and inventories,” said Michael Feroli, an economist at JPMorgan in New York. “This dynamic could continue on into the fourth quarter.”

Meanwhile Monday, U.S. consumer spending rose for a seventh straight month in September, but income recorded its smallest gain in more than a year on moderate wage growth, suggesting the current pace of spending was unlikely to be sustained.

The report from the Commerce Department on Monday also showed the increase in income at the disposal of households was the smallest in 15 months and savings dropped to their lowest level since December last year.

There are signs the stimulus from the Trump administration's $1.5 trillion tax cut package has peaked. Higher interest rates and falling household wealth after a sharp stock market selloff are also casting a shadow on spending.

"It remains to be seen how long the spending spree can continue," said Sung Won Sohn, chief economist at SS Economics in Los Angeles. "The stimulus from the tax cut has plateaued. Rising interest rates and volatile stock markets are having a psychological as well as a real effect."

Consumer spending, which accounts for more than two-thirds of U.S. economic activity, increased 0.4 percent last month as households bought more motor vehicles and spent more on health care. Data for August was revised up to show spending advancing 0.5 percent instead of the previously reported 0.3 percent gain.

Economists polled by Reuters had forecast consumer spending increasing 0.4 percent in September. When adjusted for inflation, consumer spending rose 0.3 percent. The so-called real consumer spending climbed 0.4 percent in August.

The data was included in last Friday's third-quarter gross domestic product report, which showed consumer spending accelerating at a 4.0 percent annualized rate, the fastest in nearly four years.

The economy grew at a 3.5 percent rate in the third quarter, a slowdown from the April-June period's robust 4.2 percent pace.

The dollar was trading higher against a basket of currencies, while U.S. Treasury prices fell. Stocks on Wall Street rose, recouping some of last week's sharp losses.

INFLATION RISING STEADILY

The rise in real consumer spending in September set it on a solid growth path heading into the fourth quarter. Economists expect consumer spending to slow in the first half of 2019.

Personal income rose 0.2 percent last month, the smallest increase since June 2017, after gaining 0.4 percent in August. Disposable income also increased 0.2 percent. Wages climbed 0.2 percent after jumping 0.5 percent in August.

Wage growth remains gradual despite the unemployment rate being near a 49-year low of 3.7 percent. The saving rate fell to $975.7 billion last month, the lowest level since December 2017, from $1.0 trillion in August.

Economists believe the stimulus from the tax cuts peaked in the third quarter. The stock market's S&P 500 index has dropped nearly 8 percent this month.

For now, the fundamentals for consumer spending are strong, with consumer confidence at multi-year highs.

"We expect consumption growth to moderate in first half of 2019 as the boost from the tax cuts fades, but in the near term favorable fundamentals are likely to translate into another strong holiday shopping season," said Roiana Reid, an economist at Berenberg Capital Markets in New York.

In September, spending on goods surged 0.6 percent. Consumers also spent more on sporting goods. Outlays on services gained 0.3 percent, with spending on health care offsetting a decrease in spending at restaurants and on accommodation.

Prices continued to rise steadily in September. The personal consumption expenditures (PCE) price index excluding the volatile food and energy components rose 0.2 percent after being flat in August.

That left the year-on-year increase in the so-called core PCE price index at 2.0 percent for a fifth straight month.

The core PCE index is the Federal Reserve's preferred inflation measure. It hit the U.S. central bank's 2 percent inflation target in March for the first time since April 2012.

The Fed is expected to raise interest rates again in December despite tightening financial market conditions brought about by the stock market drop and a rise in U.S. Treasury yields. The central bank raised rates in September for the third time this year and removed a reference to monetary policy remaining "accommodative" from its policy statement.

"The recent stability in core inflation will discourage the Fed from hiking rates next week, but the still above-potential rate of economic growth will spur a move in December," said Sal Guatieri, a senior economist at BMO Capital Markets in Toronto. 

© 2019 Thomson/Reuters. All rights reserved.

   
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The U.S. economy is expanding at a 2.6 percent annualized rate in the fourth quarter, slower than the brisk pace in the previous quarter, the Atlanta Federal Reserve’s GDPNow forecast model showed on Monday.
atlanta, fed, growth, gdp, eocnomy
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2018-30-29
Monday, 29 October 2018 02:30 PM
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