Dogged by uneasiness over trade frictions and weak global growth, the U.S. economy’s growth inched lower over the summer.
Gross domestic product — the broadest measure of goods and services produced in the economy — grew at a 1.9% annual rate for the third quarter, according to preliminary data released by the Commerce Department on Wednesday.
There is something of a tug-of-war going on between consumers, who continue to spend, and businesses, which have sharply pulled back on investment.
The year started out with a surge, but the pace of growth declined in the spring and again over the period that spanned July, August and September.
While the Federal Reserve lowered interest rates later in the day to keep a slowdown from turning into a slide, several analysts emphasized that the economy remained rooted in solid ground.
“If I saw cracks in the consumer sector, I would be worried, but I don’t see that yet,” said Ben Herzon, executive director of U.S. economics at Macroeconomic Advisers, a forecasting firm. “The economy is not slowing into a recession.”
Consumer spending accounts for the largest chunk of GDP by far, and while its growth fell to a 2.9% annual rate from the 4.6% showing in the second quarter, it remained solid. Residential investment rose at a strong 5.1% annual rate after months of declines. Exports rose as well, but not as much as imports, a net loss.
Business investment, which includes research and development, buildings and equipment, was disappointing, though, with a 3% drop. Spending on factories and offices sank by a whopping 15.3%.
Third-quarter growth suffered a bit from a six-week strike at General Motors that halted production. Troubles at Boeing, the nation’s largest aerospace manufacturer and its largest manufacturing exporter, have also nibbled away at output. The company’s 737 Max has been grounded after two calamitous crashes, and deliveries of planes coming off the assembly line have largely halted.
Herzon sees those as temporary developments. And businesses that have stepped back from building inventories, he argued, will reverse course soon.
Consumer prices, excluding the volatile food and energy sectors, rose at a 2.2% rate, slightly above the Fed’s target.
Number has political resonance
The economic data will help shape campaign narratives for the 2020 presidential election. Democratic candidates have focused not just on the total size of the economy, but also on how its rewards are distributed.
President Donald Trump has repeatedly highlighted the economy’s performance as evidence that his recipe of tax cuts, deregulation and confrontational tactics on trade is working.
The annual growth rate, though, has fallen short of the president’s repeated promise that it would surpass 3%, or even 4%. In July, the White House predicted that the figure would hit 3.2% in 2019, and remain at 3% or above for the next five years.
That outlook is far more optimistic than those of the Fed, the Organization for Economic Cooperation and Development and most Wall Street analysts. Most forecasts hover around the 2% mark — a rate that many economists consider sustainable over the long haul. Steve Rick, chief economist at CUNA Mutual Group, characterized the 1.9% rate as “a nice soft landing” in line with long-term growth trends.
Still, it is a pace that Trump scorned in his 2016 campaign.
Trade battle with China
Word from Trump that the United States and China are close to completing what he calls “Phase 1” of an agreement helped calm some of the roiling anxiety swirling around trade relations. But there have been no substantive details on what a pact would include, and analysts remain wary that this potential breakthrough, like previous ones, could be followed by an abrupt policy reversal from the White House.
“There’s been a big drop in business confidence, across the board,” said Ian Shepherdson, chief economist at Pantheon Macroeconomics. “This ‘Phase 1’ thing is trivial compared to enormous obstacles.”
Summertime shopping might have been given an artificial lift by importers who rushed to bring in goods from China before tariffs were scheduled to increase in September, Shepherdson added. But that short-term gain, he warned, could mean a falloff in the next three months.
Missteps could change outlook
During the first three months of 2019, the economy confounded downbeat prognosticators and grew at an annual rate of 3.1%.
As the temporary lift from tax cuts faded and hopes for a trade deal with China fell apart in the spring, growth slacked off in April, May and June. The annual rate shrank to 2%. Trade tensions and a slowing worldwide growth hit the manufacturing sector particularly hard. Exports fell and business investment slumped.
Worries about a recession thickened over the summer. Trump escalated his attacks on China and unleashed another round of retaliatory tariffs. Wall Street was particularly unsettled by quirky movements in the bond market that have usually been associated with recessions. Industrial activity around the globe stalled.
Since then, the concerns have abated.
“The biggest risks to the economy today are uncertainty and complacency,” Cris deRitis, deputy chief economist at Moody’s Analytics, said in an analysis. “With political risks and uncertainty casting a shadow across economic regions” around the world, he added, “the potential for policy errors and significant global shocks may overwhelm solid economic fundamentals.”