Cooling down of U.S. economic growth in the third quarter

Cooling down of U.S. economic growth in the third quarter

U.S. economic growth cooled in the third quarter as firms let inventories dwindle and the pace of spending on the part of consumers, businesses and governments all decelerated

Gross domestic product, the broadest measure of goods and services produced across the economy, advanced at a 1.5% seasonally and inflation adjusted annual rate in the third quarter, the Commerce Department said October 28, 2015

The July through September reading marks a sharp deceleration from the second quarter when the economy expanded at a 3.9% rate.

From a year earlier, the economy advanced 2% in the third quarter. That represents the slowest year-over-year advance since the first quarter of 2014 and showed the economy remained locked into a modest growth rate as the expansion entered its seventh year this summer.

Many economists were looking for signs that the stronger dollar and the slowdown in China would hamper U.S. output, but international trade was only a very small drag on growth and business spending on equipment, a category tied to manufacturing, expanded.

Instead, the change in private inventories was by far the largest factor holding back stronger growth, subtracting 1.44 percentage points from the overall advance. The pairing down of stockpiles could suggest businesses aren’t confident about future demand and avoided over-producing. The figure could also reflect that falling prices for oil and other commodities caused the dollar value of inventories to decline.

Real final sales, a measure of economic output that excludes changes in inventories, increased at a 3% pace in the third quarter, only a slight slow-down from the 3.9% advance the prior quarter.

Still, the unspectacular overall growth is the latest worrying sign that the economic expansion may be fizzling. The reading comes in the same quarter employers slowed their hiring after 18 months of adding an average of more than 200000 jobs per month. Meanwhile, a large number of Americans remain on the side-lines of the labour market, and wage growth has been unimpressive, factors that could restrain consumer spending.

Consumer spending increased at a 3.2 % rate in the third quarter, compared with a 3.6 % advance during the prior three months. The recent gain was led by strong spending on long-lasting goods, including vehicles.

Spending on home building and improvements rose by 6.1%, a slowdown from the roughly 10% growth rate recorded over the prior three quarters. Meanwhile, business investment advanced modestly last quarter, up 2.1% versus 4.1% in the second quarter. Spending on construction declined, but investments in equipment increased at a faster pace than in the spring. The pace of spending on intellectual property slowed.

Trade was basically a neutral factor on the overall economy, subtracting 0.03 percentage point from the growth rate. Exports, which add to output, increased at a 1.9 % rate during the quarter. Imports, which subtract from output, increased 1.8 %.

Government spending, which has largely been a drag on economic growth since 2010, advanced at a 1.7 % pace in the third quarter, a slowdown from the 2.6 % gain the prior quarter. Third-quarter spending at the state and local level offset a pullback in defence outlays.

The latest reading on economic growth, and a subsequent revision next month, will weigh on the minds of Federal Reserve officials when they meet next in December. The Fed held benchmark interest rates steady on October 28, 2015. The central bank said the economy “has been expanding at a moderate pace,” while explicitly noting that will consider a rate increase at the next policy-making meeting.  

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