Government Reports Strong Economic Growth In Third Quarter, But It’s Unlikely To Last
The economy grew strongly in the third quarter of the year, but it doesn't seem likely to last.
The latest report on economic growth in the third quarter of 2016 shows that the economy was moving at a strong pace in the late summer, but it’s unclear how long that’s going to last:
WASHINGTON — The U.S. economy grew at a 3.5 percent annual rate in the July-September quarter, the fastest pace in two years and more than the government had previously estimated. But the growth spurt isn’t expected to last.
The gain in the gross domestic product, the economy’s total output of goods and services, came from added strength in consumer spending, business investment and the government sector, the Commerce Department said Thursday. The government had previously estimated last quarter’s annual growth rate at 3.2 percent.
The economy’s acceleration last quarter marked a sharp pickup from the tepid annual growth of 0.8 percent in the first quarter and 1.4 percent in the second. Still, growth is expected to slow to a roughly 1.5 percent annual rate in the October-December quarter, reflecting in part less consumer spending and less business stockpiling.
Growth for the entire year, economists say, is likely to be around 1.5 percent. That would be down from 2.6 percent in 2015 and would be the weakest performance since the economy shrank 2.8 percent in 2009 at the depths of the worst economic downturn since the 1930s. The recovery began in mid-2009, but growth has averaged just over 2 percent, the weakest expansion in the post-World War II period.
President-elect Donald Trump had criticized the sluggish pace of growth during the campaign and said his economic policies would accelerate annual GDP growth to 4 percent or better. To do that, Trump said he would eliminate many government regulations, boost spending on the nation’s aging infrastructure and slash taxes.
Most economists don’t think 4 percent growth is realistic, given a chronic slowdown in worker productivity and a slower-growing U.S. workforce due in part to retiring baby boomers.
Most forecasters expect growth of around 2.5 percent next year, though they say those estimates could rise if Trump wins congressional support for much of his economic program. Stock markets have risen sharply since Trump’s election, partly a reflection of optimism that his proposals would boost growth and corporate profits.
Thursday’s report was the government’s third and final estimate of GDP growth for the July-September quarter. The upward revision mainly reflected stronger consumer spending, which grew at a 3 percent annual rate, more than the 2.8 percent pace that was estimated a month ago. Consumer spending is closely watched because it accounts for about 70 percent of economic activity.
The government also revised up its estimate for business investment: It showed an increase at a 1.4 percent annual rate, up from a much smaller 0.1 percent rate in the previous estimate.
Government spending was also revised up to show growth at a 0.8 percent annual rate, an increase that reflected a smaller drag from cutbacks at the state and local level.
This report, of course, comes just about a week after the Federal Reserve Board’s decision to raise interest rates for only the second time since the Great Recession ended in 2009, and the first time in a year. In part, I suppose, it explains the Board’s decision notwithstanding the fact that much of the economic news we’d seen in advance of the announcement didn’t really indicate that the economy was growing at a fast pace at all. At the same time, though 3.5% growth for a single quarter is hardly explosive and the fact that most analysts are projecting that growth for the entirety of 2016 is expected to only be somewhere in the range of 1.5 %, it doesn’t seem likely that this growth is going to carry over into the new year. Indeed, as we have seen in the past, it’s often the case that the first quarter of the year is a time when the economy can be especially vulnerable to outside pressures from things as hard to predict as the weather. If we have another particularly hard winter over the next two or three months, then we could end up with a start to the year where the economy grows at an even slower pace than what’s predicted for the coming year.
Of course, the economic outlook for the coming year will also be strongly impacted by the policies enacted by the incoming Administration and the Republican Congress, and it’s still unclear exactly what we’ll see there. Republicans on Capitol Hill, for example, are talking about tax reform, including reforms designed to encourage corporations to repatriate huge amounts of cash currently sitting in accounts abroad in order to take advantage of lower corporate tax rates in Europe and elsewhere. At least on paper, the United States has some of the highest corporate tax rates in the world and many economists on both sides of the aisle have said that this discourages corporate investment by multinational corporations in the United States, which has been one of the main factors holding back economic growth and increased employment. Cutting those tax rates could help spur economic growth at least in the short term and would also increase Federal tax revenues if it did in fact lead to the repatriation of corporate cash currently sitting in foreign accounts. The Trump Administration, on the other hand, could have other ideas, including an infrastructure plan even larger than the one passed as part of President Obama’s 2009 economic stimulus bill. That plan is likely to have more support among Democrats than Republicans, though, and could face an uncertain future in Congress unless lawmakers and find offsetting cuts to match spending increases. Between that uncertainty and other factors, it’s hard to say exactly where the economy is headed in the coming year.