Consumers support U.S. economy as business spending
slumps
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[October 31, 2019] By
Lucia Mutikani
WASHINGTON (Reuters) - U.S. economic growth
slowed less than expected in the third quarter as a further contraction
in business investment was offset by resilient consumer spending,
further allaying financial market fears of a recession.
The Federal Reserve cut interest rates for the third time this year on
Wednesday amid lingering threats to the longest expansion on record from
uncertainty over trade policy, slowing global growth and Britain's
departure from the European Union.
The U.S. central bank, however, signaled a pause in its easing cycle,
which started in July when it reduced borrowing costs for the first time
since 2008.
"An orderly economic slowdown is in progress," said Sung Won Sohn, a
business economics professor at Loyola Marymount University in Los
Angeles. "Unfortunately, businesses do not share the same optimism
consumers have."
The Trump administration's trade war with China has eroded business
confidence, contributing to the second straight quarterly contraction in
business investment. The fading stimulus from last year's $1.5 trillion
tax cut package is also sapping momentum from the expansion, now in its
11th year.
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There are concerns that the slump in business investment will eventually
spill over to consumer spending and significantly restrain economic
growth. But Fed Chair Jerome Powell said the central bank did not see
that risk, citing a strong labor market.
"We really don't see it," Powell told reporters. "The consumer-facing
companies that we talk to in our vast network of contacts report that
consumers are doing well and are focused on the good jobs market and
rising incomes."
Gross domestic product increased at a 1.9% annualized rate in the third
quarter, also as businesses maintained a steady pace of inventory
accumulation, exports rose and the housing market rebounded after
contracting for six straight quarters, the government said in its
advance estimate of GDP.
The economy grew at a 2.0% pace in the April-June period. Economists
polled by Reuters had forecast GDP increasing at a 1.6% rate in the
July-September quarter. Third-quarter growth marked a further slowdown
from the brisk 3.1% rate notched in the first three months of the year.
Still, the economy is expanding at its potential, estimated between 1.7%
and 2.0%.
The GDP report showed the overall trend in inflation remaining moderate
last quarter.
The dollar fell against a basket of currencies, while U.S. Treasury
prices rose. Stocks on Wall Street were trading higher.
RECESSION FEARS EBBING
Recession fears have subsided in recent months mainly on hopes of a
resolution to the 15-month trade war. President Donald Trump this month
announced a truce, delaying additional tariffs that were due in October.
But a trade deal is far from certain. Sources close to the negotiations
say Trump's demand that Beijing commit to big purchases of American farm
products has become a major sticking point in talks.
Despite last quarter's better-than-expected performance, the economy is
expected to again miss the White House's ambitious goal of 3.0% annual
growth this year. It grew 2.9% last year.
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![](../images/103119pics/busine19.jpg)
An assembly line worker works on the production line at Midwest
Automotive Designs in Bristol, Indiana, U.S., April 16, 2019.
REUTERS/Tim Aeppel/File Photo
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"The economy is still laboring against the headwinds of trade war uncertainty,"
said Chris Rupkey, chief economist at MUFG in New York. "Even if growth
miraculously soars 4.0% in the fourth quarter the economy won't grow faster than
2.8% in 2019."
Growth in consumer spending, which accounts for more than two-thirds of U.S.
economic activity, slowed to a still-healthy 2.9% rate last quarter after
surging at a 4.6% pace in the second quarter, the fastest since the fourth
quarter of 2017.
Consumer spending is being powered by the lowest unemployment rate in nearly 50
years. But moderating job growth, ebbing consumer confidence and stalling wage
gains are raising doubts about the consumer's resilience.
Income at the disposal of households rose at a 4.5% rate in the third quarter
compared to a 4.8% pace in the prior period.
A separate report on Wednesday showed private payrolls increased by 125,000 jobs
in October after rising 93,000 in September. Job gains have been slowing this
year because of slowing demand and worker shortages.
"If hiring weakens any further, unemployment will begin to rise," said Mark
Zandi, chief economist at Moody's Analytics.
Trade tensions are undercutting capital expenditure. Business investment dropped
at a 3.0% rate in the third quarter, the sharpest contraction in more than 3-1/2
years, after falling at a 1.0% rate in the second quarter. It was pulled down by
declines in spending on equipment and nonresidential structures such as mining
exploration, shafts and wells.
Design problems at aerospace giant Boeing <BA.N> have also hurt business
investment. The world's largest planemaker last week reported a 53% drop in
quarterly profit because of the grounding in March of its best-selling 737 MAX
jets following fatal crashes in Indonesia and Ethiopia.
While that undermined investment, the planes rolling from the production lines
contributed to the $69.0 billion pace of increase in inventories last quarter.
Inventories rose at a $69.4 billion rate in the April-June period. They trimmed
GDP growth by only 0.05 percentage point in the third quarter compared to 0.91
percentage point in the second quarter.
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"It appears as though aircraft, including the 737 MAX, accounted for at most
one-fourth of the increase in private inventories in third quarter," said
Michael Feroli, an economist at JPMorgan in New York.
The rebound in exports blunted a surge in imports, leading to a narrowing in the
trade deficit. Trade subtracted a negligible 0.08 percentage point from GDP
growth in the third quarter after cutting 0.68 percentage point in the prior
period.
Government spending cooled after rising at its fastest pace in 10 years in the
second quarter. Spending on homebuilding increased at a 5.1% rate, rising for
the first time since the fourth quarter of 2017, thanks to lower interest rates.
(Reporting by Lucia Mutikani; Editing by Andrea Ricci)
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