U.S. economy shows solid growth, but it’s about to be tested
The U.S. economy is showing steady, solid growth despite the shaky global environment, but its resilience will be tested in the coming months.
The nation’s economic output expanded at a healthy 3.5% annual rate in the third quarter, the government said Thursday, thanks to unusually strong federal spending and a sharp narrowing of the trade deficit.
Economic activity in the previous quarter had bounced up 4.6% after a brutal winter had brought a 2.1% contraction at the start of the year.
Real gross domestic product, the broadest measure of economic activity after adjusting for inflation, has now increased at an annual rate of 3.5% or higher in four of the last five quarters. That is an acceleration from what has been a sluggish recovery since the Great Recession ended in mid-2009.
In recent months, job growth also has increased and the unemployment rate has fallen to below 6%, though there is still an unusually large number of people without jobs or stuck in part-time work.
The latest report also validates the Federal Reserve’s statement Wednesday that the U.S. recovery was strong enough for the central bank to end its long-running bond-buying program to stimulate the economy.
Although the report was clearly positive and helped lift stocks, economists at the moment see GDP growth in the last three months of the year coming in at less than 3%. And some special factors in the third-quarter report explain why.
Government spending surged 4.6% in the third quarter, the fastest annual rate since the fiscal stimulus days of 2009. That came mainly from a huge spike in military spending, which some analysts attributed partly to the U.S. bombing of Islamic militants in the Middle East.
But there has been no budget increase for additional military spending, said Dean Baker, co-director of the Center for Economic and Policy Research in Washington.
“This is capacity that was otherwise sitting idle,” he said. “The blip in spending will probably be reversed” in the current quarter.
The other unexpected big boost came from a lower trade deficit in good part because of a drop in U.S. imports. That’s an improvement for the wrong reason, said Cliff Waldman, an economist at the Manufacturers Alliance for Productivity and Innovation, a research group in Arlington, Va.
“What does that say about U.S. demand?” he said.
If contributions from government spending and net exports fade in the near term, that leaves consumers and businesses to pick up the slack, and their ability to do so are question marks at the moment.
Consumer spending, which accounts for about two-thirds of U.S. economic activity, increased at a modest annual rate of 1.8% in the third quarter. Analysts expect consumers to pick up the pace in the fourth quarter, and they will have more money in their pockets because of falling gas prices.
Business spending in the third quarter was modest, with residential investment flat. Economists said housing is likely to pump more juice into the economy in the coming months. How much other companies will spend and invest is less clear.
Orders for durable goods, things such as appliances and cars that are meant to last awhile, dropped in September amid a slowdown in the global economy. The large Eurozone and Japanese economies are struggling to spur growth and avert deflation. Meanwhile, China’s growth has slowed, along with other emerging economies that are facing reduced demand for oil and other commodities.
“The economy is growing, but businesses are being exceptionally cautious,” said Bluford Putnam, chief economist at CME Group, a Chicago trading and futures company. “We’re in a risky world, and you don’t want to be overly exuberant.”
