Third Quarter GDP Solid, But Uneven

The third quarter was solid but with one uneven edge, at an inflation adjusted 1.9 percent annual rate which is near the top end of Econoday's consensus range and only 1 tenth below the second quarter's 2.0 percent rate. The good news is that strength is squarely centered in the most important component, and that's real consumer spending which rose at a 2.9 percent pace despite a very tough comparison with the second quarter's unusually strong 4.6 percent showing. And within consumer spending, durable goods continue to post very sharp growth at a 7.6 percent rate versus 13.0 percent in the second quarter with both quarters showing especially strong results for recreational goods & vehicles. This speaks to discretionary strength at the consumer level.

Residential investment is another important positive in the third quarter report, rising at a 5.1 percent rate and offering the first positive contribution to GDP since the fourth quarter of 2017. Government spending was also a plus for the third quarter, rising at a 2.0 percent rate which, however, is down from 4.8 percent in the second quarter. Federal nondefense spending led the quarter at a 5.2 percent rate with defense at 2.2 percent growth.

The report's big negative is a second straight quarter of contraction for nonresidential fixed investment, falling 3.0 percent after the prior quarter's decline of 1.0 percent. Nonresidential structures showed special weakness with equipment also in contraction. The Federal Reserve, citing slowing global growth, has signaled special concern over the outlook for US manufacturing and specifically the outlook for related business investment. These results will add to the arguments for those on the FOMC who are pushing for a rate cut at today's meeting.

Net exports were a small negative in the quarter, pulling GDP down by 0.08 percentage points despite a turn higher for exports. Inventories pulled GDP down by 0.05 points for a second straight negative contribution.

But it's consumer spending and its contribution of 1.93 points that headlines third-quarter GDP, pointing to fundamental momentum for the economy and ultimately reflecting the strength of the US labor market.