Consumer spending, corporate profits lift U.S. third quarter GDP growth revised to 3.2%

Consumer spending and strong business investment lifted real gross domestic product (GDP) in the third quarter at an annual rate of 3.2%, according to the third estimate released Thursday (Dec. 21) by the Bureau of Economic Analysis (BEA).

The final third quarter spotlight on U.S. economic growth is slightly below the “second” estimate of 3.3%, but just above the 3.1% GDP growth in the second quarter. The 3.2% economic growth is also better than Wall Street consensus forecasts of 3% in the third quarter, and the nation’s strongest economic expansion since the second quarter of 2015.

BEA releases three versions of the quarterly estimate for GDP. “Advance” estimates are released near the end of the first month of each quarter and are based on source data that are incomplete or subject to further revision by the source agency. Second and third estimates are released near the end of the second and third months, respectively, and are based on more detailed and more comprehensive data as they become available.

A year ago, real gross domestic product – the value of the goods and services produced by the nation’s economy less the value of the goods and services used up in production, adjusted for price changes – increased at an annual rate of 2.9% in the third quarter of 2016. For the year, Wall Street analyst expect the U.S. economy to grow at an annual rate of 2.3%, up significantly from weak annual GDP growth of only 0.8% in fiscal 2016.

The GDP report comes just over a week after the Federal Open Market Committee (FOMC), which sets U.S. monetary policy, raised the federal funds target rate by 25 basis points or 0.25% to the 1.25%-1.5% range at the Dec. 13 policy meeting.

Since then, several major U.S. banks and lenders have announced their intentions to incrementally raise interest rates on some consumer-related financial products, such as mortgages and personal loans. In its monthly mortgage offer report, Online mortgage lending giant Lending Tree said consumers with strong credit scores will have better access to consumer financial products with higher loan amounts and attractive interest rates.

According to the BEA, the increase in real GDP in the third quarter reflected positive contributions from personal consumer spending, private inventory and nonresidential fixed investment, improving exports, and robust government spending at all levels. Those gains were partly offset by a negative contribution from residential fixed investment. Imports, which are a subtraction in the calculation of GDP, were down.

RSM, a leading U.S. provider of audit, tax and consulting services, said Wednesday that its “middle market” business index reached a record high, continuing an upward year-over-year trend with 2017 as the best year for the index, and the most optimistic middle market leaders have been since the index debuted in 2015.

This quarter, nearly two-thirds of middle market leaders expressed confidence that revenues and net earnings will increase in 2018, and anticipated pricing increases for both goods and services delivered and received. They also signaled plans to increase hiring and compensation in the next six months.

“Middle market leaders’ optimism in Q4 2017 coincides with outside conditions, including a strong GDP outlook, increasing consumer spending and improving global economic conditions,” said Joe Brusuelas, RSM US chief economist. “The middle market is responding to growth expectations in line with the broader economy, despite ongoing uncertainty on the regulatory and political landscape. They also have expectations that point to a strong first half of 2018.”

GDP DETAILS
Nationwide, real gross domestic income (GDI) increased 2% percent in the third quarter, compared with an increase of 2.3% in the previous quarter. The average of real GDP and real GDI, a supplemental measure of U.S. economic activity that equally weights GDP and GDI, increased 2.6% in the third quarter, compared with an increase of 2.7% in the second quarter.

Current-dollar GDP increased 5.3%, or $250.6 billion, in the third quarter to a level of $19.5 trillion In the second quarter, current-dollar GDP rose 4.1%, or $19.2 trillion. Profits from current production rose $90.2 billion in the third quarter, up a whopping 526% from only $14.4 billion in the second quarter.

Profits of domestic financial corporations increased $47.8 billion in the third quarter, in contrast to a decrease of $33.8 billion in the second. Profits of domestic nonfinancial corporations increased $10.4 billion, compared with an increase of $59.1 billion. Rest-of-the-world profits increased $32.0 billion, in contrast to a decrease of $10.8 billion. In the third quarter, receipts increased $26.9 billion, and payments decreased $5.2 billion.

The price index for gross domestic purchases increased 1.7% in the third quarter, compared with an increase of 0.9% in the second quarter. The PCE price index was up 1.5% for the three-month period, compared with an increase of 0.3% in the previous quarter. Excluding food and energy prices, third quarter PCE price index increased 1.3%, compared with a 0.9% jumped in the second quarter.

The downward revision to the one percentage point change in real GDP from the second quarter primarily reflected a downward revision to PCE that was partly offset by an upward revision to state and local government spending.

In passing the historic $1.5 trillion tax reform plan on Wednesday, the U.S. Treasury Department’s Office of Tax Policy has said for President Donald Trump’s first major legislative victory to get the revenue impact of higher growth, the U.S. economy must grow at an annual rate of 2.9% real GDP over the next 10 years. In the past decade, BEA data shows the nation’s economy has only seen lukewarm annual GDP growth of only 2.2%, well below the economic boon predicted by the Trump administration and GDP lawmakers through 2028.

The Atlanta Fed’s GDPNow forecast for fourth quarter real GDP growth is 3.3%, unchanged from its week ago estimates. The BEA will release its fourth quarter and annual GDP “advance” estimate on Jan. 26, 2018.