The U.S. economy is expanding at a 4.4 percent annualized rate in the third quarter, the Atlanta Federal Reserve’s GDPNow forecast model showed Friday despite retail sales recording their smallest gain in six months in August.
Consumers cut back on purchases of motor vehicles and clothing, but upward revisions to July retail-sales data kept intact expectations of strong economic growth in the third quarter.
Friday's revised forecast was higher than the 3.8 percent pace calculated by the regional Fed’s forecast program on Sept. 11, the Atlanta Fed said. The next GDPNow update is Wednesday, September 19.
The nowcast of third-quarter real personal consumption expenditures growth increased from 3.0 percent to 3.7 percent after this morning's retail sales report from the U.S. Census Bureau and the industrial production release from the Federal Reserve Board of Governors.
The economy grew at a 4.2 percent annualized rate in the April-June period, the fastest in nearly four years and almost double the 2.2 percent pace set in the first quarter.
Growth estimates for the third quarter top a 3.0 percent rate, but Hurricane Florence, which crashed into the Carolinas on Friday, could put a dent into output. The hurricane could negatively impact labor market, housing, retail sales and industrial production data for September.
For now, the predictions for solid third-quarter economic growth prevail. A report from the Fed on Friday showed industrial production increased 0.4 percent in August after a similar gain in July. Industrial production was powered by an acceleration in the output of motor vehicles, utilities and mining.
Meanwhile, other economic data on Friday showed the biggest drop in import prices in more than 1-1/2 years in August amid a decline in the cost of fuels and a range of other goods. The weak import price data came on the heels of soft inflation readings in August.
Signs of cooling consumer spending and inflation did not change views that the Federal Reserve will raise interest rates later this month. The U.S. central bank has increased borrowing costs twice this year.
“The seas are calm for the economy with enough wind in the sails to keep the expansion on track and not enough inflation pressures out there to halt the economy’s forward progress,” Chris Rupkey, chief economist at MUFG in New York, told Reuters.
The Commerce Department said retail sales edged up 0.1 percent last month, the smallest rise since February. Data for July was revised higher to show sales rising 0.7 percent instead of the previously reported 0.5 percent gain.
Economists polled by Reuters had forecast retail sales increasing 0.4 percent in August. Retail sales in August advanced 6.6 percent from a year ago.
Excluding automobiles, gasoline, building materials and food services, retail sales nudged up 0.1 percent last month after an upwardly revised 0.8 percent jump in July. These so-called core retail sales correspond most closely with the consumer spending component of gross domestic product.
Core retail sales were previously reported to have increased 0.5 percent in July. Despite the slowdown in core retail sales in August, consumer spending remains supported by a tightening labor market, which is steadily pushing up wages.
Annual wage growth increased at its fastest pace in more than nine years in August and there were a record 6.9 million job openings in July. Spending is also being underpinned by tax cuts and higher savings as well as high consumer sentiment.
“Consumer spending will continue to increase at a sturdy pace through the rest of this year and into 2019, supporting overall economic growth,” said Gus Faucher, chief economist at PNC Financial in Pittsburgh.
The dollar rose against a basket of currencies on the data. U.S. Treasury prices fell, lifting the yield on the benchmark 10-year note back above 3 percent. Stocks on Wall Street were trading slightly lower.
WEAK AUTO SALES
The economy is poised for strong growth in the third quarter and this year, but an escalating trade war between the United States and China is casting a shadow on the long-term outlook.
President Donald Trump last week threatened duties on another $267 billion worth of Chinese goods on top of a $200 billion tariff list that is awaiting his decision. Washington already has slapped duties on $50 billion worth of Chinese imports, provoking retaliation from Beijing.
“Trade tensions are the biggest risk,” said Scott Hoyt, a senior economist at Moody’s Analytics in West Chester, Pennsylvania. “If tariffs rise globally, it will push up consumer prices, undermine job and therefore income growth, and hurt financial markets.”
Auto sales fell 0.8 percent in August after slipping 0.1 percent in July. Receipts at service stations surged 1.7 percent, likely reflecting higher gasoline prices.
Sales at clothing stores fell 1.7 percent, the biggest drop since February 2017, after accelerating 2.2 percent in July. The plunge in clothing store receipts likely reflects a sharp drop in apparel prices in August, which was the biggest since 1949.
Sales at furniture stores fell 0.3 percent and receipts at building material stores were unchanged last month.
But there were increases in online and mail-order retail sales and Americans also spent more at restaurants and bars. Spending at hobby, musical instrument and book stores rose after declining for several months.
In a separate report on Friday, the Labor Department said import prices fell 0.6 percent in August, the largest decline since January 2016, after slipping 0.1 percent in July.
The drop in import prices likely reflects the strong dollar, which has gained more than 6 percent this year against the currencies of the United States’ main trade partners.
In the 12 months through August, import prices rose 3.7 percent, slowing after surging 4.9 percent in July.
“This signals a slightly smaller inflationary impact from abroad on domestic prices going forward,” said Jake McRobie, a U.S. economist at Oxford Economics in New York.
Reports this week showed producer prices dropping in August for the first time in 1-1/2 years and consumer prices rising marginally.
Material from Reuters was used in this report.
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