MercoPress. South Atlantic News Agency

Government and consumer spending boosts US economy in third quarter

The economy is underpinned by a US$ 1.5 trillion tax cut and increased government spending

The US economy slowed less than expected in the third quarter as a tariff-related drop in soybean exports was partially offset by the strongest consumer spending in nearly four years, keeping it on track to hit the Trump administration’s 3% growth target this year.

Gross domestic product increased at a 3.5% annualized rate also supported by a surge in inventory investment and solid government spending, the Commerce Department said on Friday in its first estimate of third-quarter GDP growth. While that was a slowdown from a 4.2% pace in the second quarter, it still exceeded the economy’s growth potential, which economists put at 2%.

Compared to the third quarter of 2017, the economy grew 3.0%, the best performance since the second quarter of 2015.

But business spending stalled and residential investment declined for a third straight quarter, potential red flags to the economic expansion that is now in its ninth year and the second longest on record.

The economy is underpinned by a US$ 1.5 trillion tax cut and increased government spending. The fiscal stimulus is part of measures adopted by President Donald Trump’s administration to boost annual growth to 3% on a sustainable basis.

Yet the government is also locked in a bitter trade war with China as well as trade disputes with other trade partners and the last quarter’s slowdown mostly reflected the impact of Beijing’s retaliatory tariffs on US exports, including soybeans.

Farmers front-loaded shipments to China before the tariffs took effect in early July, boosting second-quarter growth. Since then, soybean exports have declined every month, increasing the trade deficit. There were also decreases in exports of petroleum and non automotive capital goods. Strong domestic demand, however, sucked in imports of consumer goods and motor vehicles.

The widening trade gap chopped off 1.78 percentage points from GDP growth in the third quarter. That was the most since the second quarter of 1985 and reversed the 1.22 percentage point contribution in the April-June period.

Some of the rebound in imports reflected a rush by businesses to stockpile before US import duties, mostly on Chinese goods, came into effect late in the quarter. Imports are a drag on GDP growth. But some of the imports likely ended up in warehouses, adding to the stockpile of inventory, which adds to GDP.