According to the Bureau of Economic Analysis (BEA), first estimates of GDP growth for the third quarter show the economy growing at a 3.5% annualized rate. This is down from 4.2% growth in the second quarter. The largest driver of growth was consumer spending, followed by business investment and government spending. The latter two measures contributed negligibly to the ongoing growth trend, but the contribution remained positive for another quarter. Finally, residential investment increased its rate of decline from the second quarter, while manufacturing continued to surge.
Consumer spending increased at a rate of 4.0% in the third quarter. This is up from a 3.8% rate of increase in the second quarter. Among the aggregates that make up this average, durable goods spending rose 5.8%, nondurable goods rose 5.2%, and services rose 3.2%. Altogether, consumer spending made up 2.7 percentage points of the total 3.5 percentage point estimated rate of increase for third quarter GDP.
Business investment contributed a negligible 0.12% increase in the third quarter. This is down more than one percentage point from the second quarter, when business investment increased at a rate of 1.15%.
Housing (residential) investment fell at a 4.0% rate — a steep decline from the 1.3% decline in the second quarter. However, housing fell at a 3.4% rate in the first quarter, so the 4.0% decline is not a radical departure from market trends. A major reason for the decline in investment in housing is the steady increase in the benchmark interest rate by the Federal Reserve. As interest rates rise, housing affordability declines and demand for new houses falls off. As demand falls off, builders slow their rate of new housing construction, and thus we have a residential housing number that shows its second 3-plus percent decrease of the year.
Inventories surged, and manufacturing growth continued to accelerate in the third quarter. Inventories added a little over two percentage points to the rate of growth in the third quarter, but this was by weak net trade numbers that subtracted 1.78 percentage points from the increase. Exports continued to fall, at a rate of 3.5% in the third quarter while imports continued to surge — at a rate of 9.1% in the third quarter.
Overall, the economy continues to experience a robust growth rate, driven by consumer spending, accumulation of inventories, and accelerating growth in manufacturing. The slight downturn from second quarter growth of 4.0% is the result of “a downturn in exports and a deceleration in nonresidential fixed investment,” according to the BEA. Therefore, the factors subtracting from an otherwise robust rate of growth include uncertainty in international trade markets and the slow uptick in interest rates.
Despite the slight downturn in the rate of increase, a 3.5% annualized growth rate is very good news, and displays no evidence of any serious problem with market fundamentals at this time. However, the data presented are lagging indicators of structural problems in the real economy and are constrained from elucidating any misallocation of resources by their nature as broad aggregates; they can show whether investment is up or down, but they cannot on their own provide any real evidence of whether the right kind of investment is up or down. This fact must be kept in mind, and should temper, if ever so slightly, the sense of continued optimism that must flow from another quarter of strong economic growth.