President Donald Trump signs an EO on Iran Sanctions at Trump National Golf Club, in Bedminster Township, New Jersey (06/08) - Photo by White House

JAKARTA (TheInsiderStories) – The United States (US) economy continued its strong run into the third quarter (3Q) propelled by personal consumption expenditures (PCE), private inventory investment, state and local government spending, federal government spending, and nonresidential fixed investment

The real gross domestic product (GDP) increased at an annual rate of 3.5 percent in the 3Q of 2018, according to the advance estimate released by the Bureau of Economic Analysis on Friday (26/10). In the second quarter, real GDP increased 4.2 percent.

 

Real GDP: Percent change from preceding quarter

The deceleration in real GDP growth in the 3Q reflected a downturn in exports and a deceleration in nonresidential fixed investment. Imports increased in 3Q after decreasing in the second. These movements were partly offset by an upturn in private inventory investment.

The Bureau also reported, the current dollar GDP increased 4.9 percent, or US$247.1 billion, in the 3Q to a level of $20.66 trillion. In the 2Q, current-dollar GDP increased 7.6 percent, or $370.9 billion (table 1 and table 3).

The price index for gross domestic purchases increased 1.7 percent in the third quarter, compared with an increase of 2.4 percent in the second quarter (table 4). The PCE price index increased 1.6 percent, compared with an increase of 2.0 percent. Excluding food and energy prices, the PCE price index increased 1.6 percent, compared with an increase of 2.1 percent.

While, current-dollar personal income increased $180.4 billion in the third quarter, compared with an increase of $180.7 billion in the second quarter. Accelerations in rental income, wages and salaries, and non-farm proprietors’ income were offset by a downturn in farm proprietors’ income and a slowdown in dividend income.

Disposable personal income increased $155.0 billion, or 4.1 percent, in the third quarter, compared with an increase of $168.9 billion, or 4.5 percent, in the second quarter. And, real disposable personal income increased 2.5 percent, the same increase as in the second quarter.

Furthermore, Personal saving was $999.6 billion in the third quarter, compared with $1,054.3 billion in the second quarter. The personal saving rate — personal saving as a percentage of disposable personal income — was 6.4 percent in the third quarter, compared with 6.8 percent in the second quarter.

Commenting on the results, James Knightley, ING’s Chief International Economist said, President Donald Trump will be hoping that another strong figure can give the Republican party a last-minute boost ahead of the 6 November mid-term elections.

The Republicans continue to lag behind the Democrats in generic polling while President Trump’s personal approval rating still languishes at around 44 percent, although this is up from 38 percent six weeks ago. As such it is no surprise that analysts continue to expect the Democrats to win control of the House of Representatives, but probably fall just short of winning the Senate too.

Still, there are a lot of undecided voters, and a strong GDP figure could sway people at the margin as President Trump continues to play up his and his party’s economic credentials. Moreover, Republican strategists will also be hoping that complacency amongst Democrat supporters could yet help spring a surprise in two weeks.

“In terms of expectations for the GDP report, the consensus amongst economists is that we will see a slowdown from the 4.2 percent annualised rate seen in 2Q to 3.3 percent for Q3,” he said.

However, the range of forecasts is rather broad with a low of 2.4 percent and a high of 4.2 percent. Consumer spending will be the main driver, supported by massive tax cuts, a strong jobs market and rising wage growth.

Investment spending should also be firm given the healthy economy while core durable goods orders suggest we could see an acceleration in growth in this key component. He added,” We also expect to see inventories rebound, having been run down at the fastest rate in nine years in 2Q.”

The counterweight to this will be that net exports will be a major drag on growth after having made a surprisingly large contribution in 2Q. Overall though this is set to be a very solid GDP report and will leave the US well on course to record 3 percent growth for the year as a whole, which would be the strongest outcome since 2005.

“We see no real reason to expect a collapse in growth anytime soon with 4Q GDP supported additionally by the rebuild/clean-up operations following the recent Hurricanes Florence and Michael,” said Knightley.

Move into 2019, ING likely to see some moderation in growth. The support from the fiscal stimulus will gradually fade while the lagged effects of rising interest rates and a stronger dollar will feel more of a headwind.

Escalating trade protectionism could also become more disruptive for the economy as weaker global growth and supply chain tensions lead to softer business sentiment and higher prices through tariff hikes. Nonetheless, the tight jobs market and the prospect of stronger rates of pay growth will provide a solid base, and we still think the economy can expand at a very respectable 2.4% rate for the full year 2019.

This remains a decent story, and when compared with other economies, the US is the best performing developed market economy. As the chart below shows, the US-Europe divergence in terms of both growth and the level of economic activity remains as wide as ever. We will soon see if this is recognised by the electorate.

Outlook for monetary policy

While President Trump may apparently have some regrets over hiring Jerome Powell as the Federal Reserve chair (stating that Fed interest rate hikes are the “biggest risk” to the economy in his view), criticism of the central bank will fall on deaf ears.

Inflation is already at or above the Fed’s 2 percent target on all of the key inflation measures, so while the Fed is right to say monetary policy is no longer “accommodative”, ING views are still some way from it being considered “restrictive”.

“As such we forecast the Fed will continue raising interest rates, starting with another hike in December with three more 25bp moves in 2019,” he ended.

Written by Staff Editor, Email: theinsiderstories@gmail.com

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