Is the U.S. really outperforming the rest of the major economies and will the Fed stay on track to hike rates sometime next year? Is the Greenback in for more gains? The latest U.S. GDP report might have all the answers!
1. U.S. growth hitting record highs
Number crunchers initially estimated that the U.S. economy grew by 3.5% in Q3, with some expecting a small downward revision to 3.3% for the preliminary GDP figure. However, the actual report surprised with an impressive 3.9% reading, following the previous quarter’s 4.6% expansion.
This marks the U.S. economy’s fastest pace of growth over a span of six months since 2003. That’s a new record high in over a decade! On an annualized basis, the economy grew by 2.4% in the third quarter, comfortably above the 2% year-over-year growth pace since the U.S. emerged out of recession back in 2009.
2. Upgrades in spending and investment
The stronger than expected GDP reading was a result of significant upgrades in consumer spending and business investment. Consumer spending, which accounts for more than two-thirds of overall U.S. economic growth, was revised up from an initial estimate of 1.8% to 2.2% during the period.
Analysts say that this was spurred by shopping sprees ahead of the holidays, as consumers bought more clothing and home goods. Cheaper fuel prices also allowed Americans to spend more on other items, with the average cost of a gallon of regular gasoline reaching $2.81 recently, according to automobile group AAA.
Meanwhile, business investment in new equipment was upgraded from 7.2% to 10.7% in Q3 while non-residential investment picked up by 7.1%. This indicates that business confidence is also starting to improve, which could spell better prospects in the coming months.
3. Exports growth downgraded
The downward revision in exports led to a narrower trade gap from the previous estimate of 1.3% to just 0.8%. This implies that, even as local demand could remain strong, the economic downturn among the country’s trade partners could still wind up hurting trade activity and overall growth.
Economic experts predict that this sector could continue to face headwinds in the coming months, as the slowdown in the euro zone and Japan seems to be getting worse.
4. One-off jump in military spending?
It’s also worth noting that a considerable chunk of the U.S. GDP in Q3 came from a sharp increase in military spending and this might not be sustained throughout the year. Even though government spending chalked up back-to-back gains so far, the 16% increase in military spending will most likely be reversed in the coming months.
5. Fed on track to hike?
All in all, the latest U.S. preliminary GDP release was still enough to bolster rate hike expectations for the Fed. Bear in mind that the economy has also seen consecutive months of strong employment gains, which might be enough to ensure market participants that the current pace of growth will carry on.
Of course Fed head Janet Yellen and her gang of policymakers are still likely to maintain their cautious vibe and remind everyone that any policy adjustments will continue to be data-dependent. Do you think the U.S. economy could continue to perform this well?