US Growth Slowed in Q3, But Maybe There’s A Silver Lining

The US economy cooled in the third quarter, and by a hefty degree, according to this morning’s initial estimate of GDP for the July-through-September period. In line with market expectations, output rose at a soft 1.5% annual rate, well below Q2’s strong 3.9% rise. A key factor in the deceleration: a sluggish rise in inventories, which slashed 1.44 percentage points off of the headline GDP growth rate, marking the biggest inventory-related cut since Q4: 2012.

Looking at the numbers excluding the inventory data inspires some economists to see a net plus in today’s report. “The headline [GDP] is not indicative of how solidly the US is growing,” Gennadiy Goldberg at TD Securities tells Bloomberg. “The domestic drivers in consumption are quite strong.”

Indeed, personal consumption rose 3.2% in Q3, only modestly below Q2’s robust 3.6% increase. Meanwhile, disposable personal income’s (DPI) pace accelerated in the last quarter, advancing 3.5% vs. 1.2% in Q2. The consumer sector, in other words, continues to roll forward at a healthy rate, supported by a solid increase in income.

Perhaps, then, today’s GDP report is less troubling than the headline deceleration suggests, thanks primarily to the ongoing strength in consumer spending, which accounts for nearly 70% of US economic activity. The fact that DPI’s growth picked up implies that consumers have the capacity to maintain a brisk rate of spending in the fourth quarter.

The key variable, of course, is the labor market. The recent slowdown in the rate of growth for private payrolls raises questions about what comes next. For the moment, however, there’s still a case for cautious optimism. Note that private payrolls increased at a slightly higher rate in September vs. August, which marked the smallest rise in three years. Is that a sign that the worst has passed and that the labor market’s pace will continue to rebound?

The main event for US economic data now turns to the October report on payrolls, which is due next week (Nov. 6). Another improvement in the monthly growth rate will offer more evidence for thinking that the recent slowdown in economic growth was another temporary stumble vs. an early warning sign that the US is slipping into a new recession.

The US economic profile for September suggests that the US will muddle through. That’s also the implied message in this month’s flash estimate of Markit’s purchasing managers’ index for the manufacturing sector, which rose to a five-month high.

There’s still a long way to go for filling in the missing data points for October. But a decent payrolls report in next week’s release would tip the scales heavily in favor of anticipating that the US will steer clear of the business-cycle ditch.

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