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3Q GDP report: Economic growth cools less-than-expected

Growth in the U.S. economy decelerated less markedly than expected in the third quarter as resilient consumer spending helped offset weakness in other areas.

The Bureau of Economic Analysis released its first print on third-quarter gross domestic product at 8:30 a.m. ET Wednesday. Here were the main measures from the report, compared to Bloomberg-compiled consensus data:

  • 3Q GDP Annualized quarter-on-quarter: +1.9% vs. +1.6% expected and +2.0% in 2Q

  • 3Q Personal Consumption: +2.9% vs. +2.6% expected and +4.6% in 2Q

  • 3Q Core Personal Consumption Expenditures quarter-on-quarter: +2.2% vs. +2.2% expected and +1.9% in 2Q

Although personal consumption moderated from the second quarter, its growth rate still topped consensus expectations for the latest reported period. The second quarter’s 4.6% surge in consumer spending had been the fastest clip in four-and-a-half years. Consumer spending comprises more than two-thirds of U.S. economic activity.

Government spending also helped buoy third-quarter GDP, contributing 0.35 percentage points to the headline measure. Separately, residential real estate grew 5.1% and added 0.18 percentage points, marking a positive contribution to GDP for the first time in two years as lower mortgage rates helped drive a broad recovery in the housing market.

People walk along a main shopping street in Manhattan in New York City. (Photo by Spencer Platt/Getty Images)

Ahead of the third-quarter GDP report, consensus economists expected that weaker business investment would weigh on the pace of expansion in the July through September period. Ongoing geopolitical concerns have spurred business to shore up resources and curb new spending to prepare for a future downturn.

Nonresidential private investment turned negative for the first time since 2016 in the second quarter and contracted again during the third quarter, this time by 3.0%, or the most since the fourth quarter of 2015.

Within this, structures investment posted the steepest decline of 15.3%, with economists having anticipated that factors including weaker oil patch and factory spending would weigh on this measure.

“The capex numbers were awful,” Ian Shepherdson, chief economist for Pantheon Macroeconomics, wrote in an email Wednesday. “Investment in intellectual property strengthened, rising by a solid 6.6%, but it’s less volatile than structures and equipment spending, which appear to have fallen victim to slower earnings growth and the uncertainty caused by the trade war.”

Net exports also served as a drag, pulling 0.08 percentage points from headline growth in the third quarter.

“Incoming data point to a moderating pace of GDP growth in the second half of the year,” Sam Bullard, managing director and senior economist for Wells Fargo Securities, wrote in a note ahead of the release of the GDP report. “As the tailwinds from fiscal stimulus wane, trade policy uncertainty persists, and sluggish global demand continues, the pace of U.S. GDP growth should moderate over the coming quarters.”

This trend had been reflected in the bulk of the latest economic data releases, with many of these serving as leading indicators for the eventual GDP print. September’s manufacturing activity index report from the Institute for Supply Management showed a contraction in new orders, production and employment, and fell to the lowest level in a decade. Manufacturing comprises about 11% of domestic economic activity.

Some transitory factors, including fewer shipments of Boeing (BA) aircraft and the 40-day United Auto Workers strike on General Motors (GM), also may have generated a drag on headline GDP, other economists pointed out.

Meanwhile, the BEA’s report also showed core personal consumption expenditures (PCE) grew at a 2.2% pace in the third-quarter, matching expectations. This measure serves as the Federal Reserve’s preferred measure of inflation, with central bankers maintaining symmetrical 2% target – a level which has been elusive in recent quarters. The third-quarter’s core PCE print represents the first time the measure hit or topped 2% since the second quarter of 2018.