U.S. gross domestic product (GDP) growth remained healthy in the third quarter of 2019, according to new data from the Bureau of Economic Analysis. Specifically, real GDP, which measures the value of the production of goods and services in America adjusted for price changes (inflation), increased at an annual rate of 1.9 percent in Q3. That was only a slight decline from Q2 and much better than anticipated, which is especially encouraging since this solid GDP print followed nine consecutive quarters of growth at or above 2.0 percent and occurred amidst a backdrop of an escalating trade war. Moreover, notable detractors from growth in the third quarter included exports and business investment, with the latter falling by the most since 2015.
It was to be expected that capital spending would pull back after the above-trend gains that resulted from the passage of the Tax Cuts and Jobs Act, but the declines have clearly been exacerbated by geopolitical uncertainty. Fortunately, trade tensions eased this quarter, and if a deal is actually announced it could transform a major headwind for the economy into a tailwind, at least temporarily. More importantly, the key reason that GDP continues to expand at a healthy rate is the U.S. consumer, and personal consumption in Q3 once again exceeded estimates. This highlights how a tight labor market and firming wage growth have provided Americans with the confidence needed to keep spending and remain the main driver of the longest economic expansion on record. Although this morning's GDP report is unlikely to dissuade the Federal Reserve from cutting interest rates later today, the positive data could make it harder for the central bank to justify being as dovish as bond market pricing would imply.
Sources: Econoday, U.S. BEA, FRBSL