3rd-Quarter GDP Crushes Expectations

Economy grows at 3.0% pace

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Oct 27, 2017
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In the wake of Hurricanes Harvey (in August) and Irma and Maria (in September), the expectation among economists was gross domestic product would fall from 3.1% in the second quarter to 2.7% in the third quarter.

GDP did fall in the third quarter, but only by 0.1%. The Bureau of Economic Analysis credited “consumer spending and business investment” but also gave credit to exports and federal spending.

“Economists initially expected that Hurricanes Harvey and Irma would deal a blow to the country’s steady growth,” Natalie Kitroeff and Jim Tankersley of the New York Times observed, “but became more optimistic in recent weeks.”

“With unemployment at a 16-year low, the stock market at new highs and economic confidence soaring, the U.S. economy is surging under this president's leadership,” said White House press secretary Sarah Huckabee Sanders.

“This was one of the most uncertain quarterly GDP readings in some time,” said John Engle, president of Chicago-area family office merchant bank Almington Capital, who told GuruFocus Thursday that if some economists’ predictions of 3.0% GDP growth in the third quarter came to pass, it would be “an excellent sign that the economy is rebounding.”

After the Commerce Department confirmed 3.0% GDP growth in the third quarter, Engle said, “A positive surprise was very welcome news and indicates robust economic fundamentals. That is supported by the continued strength in consumer confidence and business investment, which have been drivers of growth.”

The hurricanes apparently did affect the GDP, though. Before the storms struck, an even stronger economic performance was expected. The Atlanta Federal Reserve Bank's GDP Now forecast initially called for third-quarter growth of 4%.

Another factor that economists were watching prior to Friday’s GDP announcement was the impact of consumer spending. Alexander Kuptsilevich, analyst for London-based FxPro, said consumer spending “positively affected” GDP growth.

“Following years of spending reservations,” Kuptsilevich said, “Americans seem to have returned to spending, cutting back on their savings and trying to secure loans before interest rates return to what are considered to be normal levels.”

Kuptsilevich noted that “such strong data seem to put concerns regarding the impact of the recent hurricanes on the economy to rest.”

Attention now turns to the budget plan narrowly approved by the House of Representatives on Thursday and the future of the administration’s tax reform package.

Senate Republicans have spoken of wanting to pass tax reform by Thanksgiving.

Following Friday’s GDP news, the White House Council of Economic Advisers reported that proposed tax cuts would boost GDP by 3% to 5% in the next three years.

“For sustained growth to continue at or near this level, a number of issues will need to be addressed,” Engle said. “The tax and spending plan taking shape in Congress, as well as the Trump administration's evolving stance on trade, will be important drivers of market confidence and economic sustainability in the months ahead.”

“These strong GDP figures are the latest in a sequence of several positive releases to have come out of the U.S.,” Kuptsilevich said, “and seem to convince investors that the economy will not stumble on previous rate hikes, at once justifying a potentially more hawkish FOMC attitude in the coming months.”