Thursday 18 January 2018

US economy grew faster than expected in third quarter at 3.1pc

US President Barack Obama
US President Barack Obama

THE U.S. economy grew faster than previously estimated in the third quarter as exports and government spending provided a lift, but that boost is likely to be lost amid slowing global demand and a move towards tighter fiscal policy.

A second report on Thursday suggested job growth remained modest, with first-time applications for state unemployment benefits rising last week. However, they were in the low end of their range before Superstorm Sandy struck in late October.

Gross domestic product expanded at a 3.1pc annual rate, the Commerce Department said, a step-up from the 2.7pc pace it reported last month.

It was the fastest growth since late 2011 and also reflected a slightly better pace of consumer spending than previously estimated. Economists had expected GDP growth would be raised to a 2.8pc pace.

In a separate report the Labour Department said initial claims for jobless benefits increased 17,000 to a seasonally adjusted 361,000. The data covered the survey period for December nonfarm payrolls.

"The pace of hiring is still disappointing with firms concerned about the impact of the fiscal cliff on demand," said Tanweer Akram, a senior economist at ING Investment Management in Atlanta, adding that the pace of GDP growth in the current quarter "remains quite soft."

The so-called fiscal cliff refers to $600bn in automatic government spending cuts and higher taxes that could be drained from the economy early next year unless an agreement is reached on a less punitive plan to reduce budget deficits.

President Barack Obama is holding talks with Republicans over the fiscal cliff.

Tighter fiscal policy and a cooling global economy could weigh on the domestic economy in the coming quarters.

Job gains so far this year have averaged 151,000 per month, a pattern that is likely to hold through December. The sluggish labor market is constraining spending.

Growth in the third quarter was revised higher to show a much faster pace of export growth and the first decline in imports in more than three years.

Exports grew at a 1.9pc rate, rather than 1.1pc, helping to narrow the trade deficit. Trade contributed 0.38 percentage point to GDP growth. The drop in imports is a sign of weak domestic demand.

Government spending was revised to a 3.9pc growth rate from 3.5pc, boosted by a rebound in state and local government outlays. It added three quarters of a percentage point to GDP growth in the third quarter.

While growth in consumer spending, which accounts for about 70 percent of U.S. economic activity, was raised by 0.2pc point to a 1.6 percent rate, that was mostly due to increased spending on healthcare.

Business inventories were trimmed to $60.3bn from $61.3bn. Restocking by businesses contributed 0.73 percentage point to GDP growth.

Given the sluggish spending pace, some of the inventory accumulation might have been unplanned, suggesting businesses will need to liquidate stocks this quarter because of weak demand.

Excluding inventories, GDP rose at a revised 2.4pc rate. Final sales of goods and services produced in the United States had been previously estimated to have increased at a 1.9pc pace.

Elsewhere, details of the report were mixed. Business spending was revised to show cutbacks that were not as sharp as previously reported. Business investment fell at a 1.8pc rate instead of a 2.2pc decline. That was the first drop since the first quarter of 2011.

Part of the drag in business investment, which had been a source of strength for the economy, came from equipment and software, where spending was the weakest since the second quarter of 2009.

The report also showed that after-tax corporate profits rose at a 2.5pc rate in the third quarter rather than 3.3pc.

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