Good, but not great.
For many on Wall Street, that sums up the latest Gross Domestic Product (GDP) report released on Wednesday by the U.S. Department of Commerce. GDP is the total dollar value of goods and services produced by the U.S. The much-anticipated report gave the markets their first insight at economic growth in the July-September third quarter.
In 2017 and 2018, economic growth surged by 2.4% and 2.9%, respectively. In the first quarter of this year, economic growth was even higher, at 3.1%. But in the last six months, America’s economic growth has faced some headwinds. Based on Wednesday’s report, the U.S. economy grew at an annualized pace of just 1.9% in the third quarter. This was slightly below the second-quarter rate of 2%.
But the markets weren’t expecting great. This is not the high-octane economy of 2017 and 2018. Instead, this is an economy that’s finally feeling the strain of a very weak global economy and America’s ongoing trade dispute with China. An aggressive 3% target growth rate has been replaced with more modest expectations. In the short-term, the 2.17% average rate of growth experienced between 2010-2016 appears a more reasonable goal.
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Of all the components used to measure U.S. economic growth, the markets’ primary focus was on just one — consumer spending. In the U.S., consumer spending accounts for more than two-thirds of all economic growth. In the past six months, its importance has been even greater. We continue to see softness in business spending, manufacturing, corporate earnings and business capital expenditures on factories, equipment and technology. The lone bright spot remains consumer spending, which has become the singular, de facto driver to the U.S. economy.
In the third quarter, Personal Consumption Expenditures — the consumer spending component of economic growth — grew at an annualized rate of 2.9%. This was below the robust second-quarter growth rate of 4.6%. But a closer look reveals the third-quarter rate was still above the 2.8% average growth rate during the height of the 2017-2018 economic boom. More importantly, this reaffirmed to the markets that the nation’s biggest contributor to economic growth is still healthy.
Certainly, a lot of pressure has been placed on the sturdy shoulders of the American consumer. Looking forward to 2020, the global economy is expected to at least stabilize. The markets are also hoping that new trade agreements, including the U.S.-Mexico-Canada Trade Agreement and the U.S.-China Trade Agreement, will be resolved by year-end.
But the big question remains: Can the American consumer continue to carry the load of economic growth until we see a rebound in the other components of the U.S. economy? For now, at least, the answer has been yes.