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US GDP Expands 2.9 Percent in Q3 on Exports and Inventories

Posted by Joseph Trevisani on Oct 28, 2016 3:36:13 PM

The U.S. economy regained some of its momentum after three dismal quarters but the underlying factors propping up growth are unlikely to be extended to the year end.

Gross domestic product expanded at a 2.9 percent annual rate from July through September, better than the 1.4 percent pace in the second quarter and the 2.6 percent median forecast, reported the Commerce Department on Friday. It was the fastest pace since 5.0 percent in the third quarter of 2014,

The stronger than anticipaed expansion should give the Fed more confidence in the durability of the U.S. recovery when it contemplates hiking rates at its November 2nd meeting, where the chance of an increase is rated at 17.1 percent by the Fed Funds futures and at its December 14th meeting, when the odds were considered 69.2 percent as of Friday afternoon. 

While consumer spending, normally the bulwark of economic growth cooled, dropped to  2.1 percent from 4.3 percent in the prior quarter, business  equipment purchases fell by 2.7 percent, residential investment went down 6.2 percent and government spending was at its lowest share of GDP since 1950, help came from a surprising source, agriculture. Soybeans to be precise.  

A bumper U.S soybean crop coincided with very poor production from Argentina and Brazil, normally the world’s largest exporters, and strong demand from China, which drove exports to a third of the dollar measured increase in third quarter GDP.  

Of the $119 billion in chained dollar gain in GDP, exports accounted for $41 billion or 34 percent. Soybeans were $38 billion or 93 percent of exports and 32 percent of GDP growth. Under the Bureau of Economic Analysis accounting methods exports add to the rate of GDP growth and imports subtract. Another 10 percent of the GDP increase came from rising health care expenditures. 

The surge in net trade added about 0.8 percent to the quarterly GDP number. Exports themselves added 1.17% but that was reduced by imports into the U.S. Another 0.6 percent addition to GDP came from business rebuilding of inventories after a long period of consolidation.

The boon from soybeans is clearly a one-time event. The inventory build and the economic activity that produced it will not be repeated unless those goods move promptly from warehouse to sale. With consumer spending falling by half in the current quarter that is a questionable proposition. Business investment subtracted about 0.1 percent from Q3 GDP, its fourth quarterly decline in row.

Excluding these transitory GDP effects the remaining base line growth in the economy was about 1.5 percent, a bit stronger than the 1.0 percent average of the prior three quarters. Subtract the health care increase, most of which is mandated by the new health law and growth drops to about 1.0 percent. 

A separate repost of from the Bureau of Labor Statistics, the Employment Cost Index, showed that employee compensation costs for the third quarter rose 0.6 percent, and were up 2.3 percent on the year, compared to a 2.0 percent gain a year ago. 

Joseph Trevisani

Chief Market Strategist

WorldWideMarkets Online Trading

Charts: Bloomberg

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