Published: Tue, October 30, 2018
Finance | By Cynthia Curry

The U.S. economy grew by 3.5 percent in the third quarter

The U.S. economy grew by 3.5 percent in the third quarter

However, strong consumer and government spending helped to bolster the economy.

The U.S. economy slowed in the third quarter to a still-strong 3.5 percent annual growth rate, the Commerce Department said in its final assessment of economic health before the November congressional elections. But Friday's third quarter GDP report may be the best hard evidence yet that the tariffs are causing major disruptions in the economy.

According to the report, from the third quarter of 2018, with downward pressure on economic growth, the country's GDP growth will stay between 6.58 percent and 6.64 percent, a decrease of 0.26 percentage points to 0.32 percentage points over the previous year, and the GDP growth will slip to between 6.42 percent and 6.48 percent in 2019. However, there were some red flags to the expansion of the economy that is now in a ninth straight year, which is the second longest ever recorded.

"The big swings in trade and inventories between the second and third quarters are likely at least partially due to changes in activity associated with trade policy", said Daniel Silver, an economist at JPMorgan in NY.

Real GDP can be higher than real potential GDP if the economy gets extra stimulus from government spending or tax cuts.

This latest figure, however, still does reflect the anticipated negative impact from the tariffs President Donald Trump's administration has imposed on the majority of Washington's trading partners, including China and the EU.

Net exports also declined from a surge last quarter as manufacturers and farmers rushed to sell their goods overseas in advance of expected retaliatory tariffs from China.

Meanwhile, American imports, which subtract from GDP calculations, rose sharply, largely driven by purchases of autos and consumer goods.

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However, the drag from trade was probably offset by faster inventory accumulation by businesses stockpiling before USA import duties, on mostly in Chinese goods, came into effect.

"I think we will see a significant slowdown, in part because economic growth has been raised to an artificially high level by the tax cuts", said Sung Won Sohn, chief economist at SS Economics in Los Angeles.

The slowdown in business spending "came earlier and was more than we expected, given where the stimulus is", Coronado said. Imports subtract from GDP growth. The rebound in imports also reflected a rush by businesses to stockpile before United States import duties, mostly on Chinese goods, came into effect late in the third quarter.

Strong consumer and government spending powered economic growth in the third quarter, although a warning sign about the outlook emerged in the form of weak business investment.

"Growth figures are likely to slow from here heading into 2019, but there are still plenty of signs of further expansion for the US ahead", Nationwide Senior Economist Ben Ayers said via email.

Excluding the effects of trade and inventories, economists estimate GDP grew 2.8 percent in the third quarter compared to 4.0 percent in April-June. That was the fastest pace since the fourth quarter of 2014 and followed a 3.8 per cent pace of increase in the second quarter.

"With the labor market more or less at "full employment" and with some measures of inflation trending higher, we look for the Federal Reserve to continue raising rates at a gradual pace for the next year or so".

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