Despite the damages and other negative effects caused by hurricanes, the US economy has almost matched the previous quarter’s pace of expansion in Q3, driven by foreign trade improvements, and investment in goods stockpiles ahead of the massive rebuilding effort.
Kristian Rouz – The US economy expanded at a faster-than-expected pace in the third quarter despite the damages inflicted by hurricanes Harvey and Irma in the nation’s industrial hubs of Florida and Texas. An increase in stockpile investments and further declines in trade deficit drove the expansion, easing the negative effects of slower consumption and a slump in construction.
According to data from the Department of Commerce, US GDP rose by 3 percent in Q3, after a 3.1-percent expansion in the previous quarter. The last two consecutive quarters were the strongest period of US economic growth since 2014, defying earlier predictions the economy would brake sharply due to downside effect of the hurricanes, including the disruption of oil extraction and refining in the Gulf Coast.
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Consumer spending was flat, however, as weather affected retail and wholesale performance, and homebuilding investment declines as well.
“Overall, this is a very solid performance, given the disruption caused by Hurricanes Harvey and Irma,” Ian Shepherdson of Pantheon Macroeconomics said. “Their net effect seems to have been smaller and shorter than we expected.”
Excluding business spending on equipment and overall inventory investment, the economy grew 2.3 percent compared to 2.9 percent in Q2. Domestic demand alone slowed to 2.2 percent from the second quarter’s 3.3 percent.
The impact of hurricanes Harvey and Irma to US production has yet to be fully estimated, but what is known thus far is both storms resulted in losses and damages totalling $121 billion in privately-owned fixed assets, as well as an additional $10.4 billion in public-owned fixed assets.
Previous expectations for Q3 growth stood at 2.5 percent.
President Trump’s goal is to get the US economy to 3-percent growth for the entire year, as several years of the Obama-era recovery have proven the longest streak of near 1-percent growth in US economic history.
“President Trump’s bold agenda is steadily overcoming the dismal economy inherited from the previous administration,” Wilbur Ross of the Commerce Department said. “As the President’s tax cut plan is implemented, our entire economy will continue to come roaring back.”
In Q1, the US economy grew by 1.2 percent, meaning in order to get 3-percent growth for the year, post-hurricane acceleration in Q4 must hit at least the 4.5-percent mark. While not impossible, it’s rather far-fetched as salaries and wages are still stagnant and US inflation is still below the Federal Reserve’s target, whilst the central bank is preparing for a rate hike in December.
Macroeconomic data suggest the ongoing acceleration in the underlying activity, as reflected by the labor market, industrial production and retail sales figures.
“Fed officials will be encouraged by both the overall performance and the composition of growth in the third quarter, which confirms the US economic expansion remains on solid ground,” Michelle Girard of Stamford, CT-based NatWest Markets says.
US unemployment has declined to 4.2 percent, whilst exports and imports both increased in the third quarter and trade deficit declined.
Consumer spending, albeit hardly increased, is at a solid 3.3 percent. It is expected to gain momentum in Q4, as consumer sentiment, reflected by a separate report released Friday, remains robust.
Meanwhile, economists are focusing on the rebuilding efforts in Texas, Louisiana and Florida, which would greatly contribute to Q4 economic expansion. The positive effects of the higher business investment and governmental spending will last into the next year as well.
These efforts are also poised to provide a much-needed boost to residential investment after the declines of past two quarters.