U.S. economy keeps pace with 3.5% expansion in third quarter, BEA says

The U.S. economy expanded by another 3.5% in the third quarter and generated more than $20 trillion in economic activity as tax cut-fueled corporate profits jumped to their highest level in six years, according to the “second” GDP estimate released Wednesday (Nov. 28) by the Bureau of Economic Analysis (BEA).

Based on more complete economic data, real U.S. gross domestic product (GDP) stayed even with the BEA’s first or “advance” estimate released a month ago. The nation’s chief economic research group, which is housed in the U.S. Department of Commerce, revises GDP data two times after the first release as more data become available.

The strong reading for third quarter annual GDP — the value of goods and services produced by the nation’s economy less the value of the goods and services used up in production — keeps the U.S. economy on pace to close out the year at or above the Trump administration’s 3% target for annual GDP growth.

After advancing 2% and 4.2%, respectively, in the first and second quarter, the U.S. economy remained hot through July, August and September in step with Wall Street expectations. The U.S. Federal Reserve has forecasted the U.S. economy to close out 2018 with robust growth of 3.1%.

Last month at an annual economic outlook conference sponsored by the St. Louis Federal Reserve office and University of Arkansas at Little Rock’s Economic Institute, Wall Street forecaster Chris Varvares called the current rate of growth “unsustainable.” Varvares, co-head of U.S. economics at publicly-traded analytics firm IHS Markit, said the tight U.S. job market at 3.7% is too low and beyond full employment, and the nation’s economy is now growing “above trend.”

“Above trend means we are still absorbing resources in labor markets faster than they can be produced, meaning that these markets are tightening and the law of supply and demand has not been repealed …,” he said. “Current conditions in that sense are unsustainable.”

Noting that his economic forecast is keeping with the Federal Reserve Open Market Committee modernizing its “accommodative” monetary policy, the Wall Street economist said he expects the nation’s central bank to raise interest rates four times in 2018, three times in 2019 and once in 2020 to act as a brake on the overheated economy.

“We believe the Fed is reading the economy correctly, and they have also correctly surmised what level of rates would be consistent with the economy slowing back to its trend. But the financial markets don’t agree with the Fed or us,” Varvares said.

That Fed policy, along with the nation’s tight labor market and other markets, will cause the U.S. GDP growth to peak at 3.1% in 2018, fall to 2.5% in 2019, and slide below 2% in 2020 and beyond, said Varvares. Those factors, he said, will allow the U.S. economy to grow more modestly without going into a downturn.

3Q CORPORATE PROFITS UP BY $76 BILLION
For the third quarter, the increase in real GDP reflected strong gains in consumer spending, private business and capital investment, and government spending at the local, state and federal levels. Those gains were partly offset by negative contributions from U.S. residential investments and declining exports as the U.S. trade war with China and other countries hurt the farming, capital goods and automobile sectors.

Over the three-month period, real gross domestic income (GDI) increased 4% in the third quarter, compared to a revised 0.9% in the second quarter. The average of real GDP and real GDI, a supplemental measure of U.S. economic activity that equally weights GDP and GDI, increased 3.8% in the third quarter, compared with an increase of 2.5% in the previous quarter.

Current-dollar GDP increased 5%, or $248.4 billion, in the third quarter to $20.66 trillion. In the second quarter, which the U.S. economy expanded at its quickest pace since the third quarter of 2014, current-dollar GDP increased 7.6%, or $370.9 billion.

The price index for gross domestic purchases, a key measure of inflation, increased 1.7% in the third quarter, compared with an increase of 2.4% in the second quarter. The PCE price index rose 1.5%, compared with an increase of 2% in the second quarter. Excluding food and energy prices, the PCE price index increased 1.5% in the third quarter, compared to 2.1% in the previous three-month period.

Profits from current production, or corporate profits with inventory valuation and capital consumption adjustments, jumped by $76 billion in the third quarter, compared with an increase of $65 billion in the second quarter.

Profits of domestic financial corporations decreased $7.8 billion in the third quarter, in contrast to an increase of $16.5 billion in the second quarter. Profits of domestic non-financial corporations increased $66.2 billion, compared with an increase of $53.0 billion. Rest-of-the-world profits increased $17.6 billion, in contrast to a decrease of $4.5 billion. In the third quarter, receipts decreased $7.7 billion, and payments decreased $25.3 billion.

The BEA will release its third and final GDP estimate for the third quarter on Dec. 12, which will include a final tally of corporate profits. The Atlanta Fed’s GDPNow model now forecasts fourth quarter GDP at a modest 2.5%, which will allow the U.S. economy to close out 2018 at just above 3% annual growth.