We’re Just Muddling Along

The U.S. economy expanded at an annualized 2% in the third quarter, the Bureau of Economic Analysis reports. The rate of GDP increase for July through September is up slightly from Q2’s 1.7% pace, but still well below the 3.7% logged in this year’s first quarter or the robust 5.0% reading from last year’s final three-month stretch. In other words, the economy’s continuing to muddle along with enough forward momentum to keep another recession at bay. At the same time, today’s GDP report isn’t likely to inspire confidence that economic growth is sufficient to cure the sluggish trend in the labor market—the primary macro challenge these days.

Notably, personal consumption expenditures (PCE)—which account for around 70% of GDP—grew in Q3. In fact, consumer spending’s pace accelerated, advancing at an annualized 2.6% rate, up from 2.2% in Q2. The rate of increase in consumer spending has climbed in each of the past three quarters. Within PCE, however, the bulk of the higher spending has come from services, which includes a range of consumption arenas—everything from transportation to healthcare. By contrast, the rate of spending slowed modestly for durable and nondurable goods—the cyclically sensitive slices of PCE.

Nonetheless, the much-feared retreat of the American consumer wasn’t evident in today’s update. That’s no assurance that spending won’t slip in the quarters ahead. Certainly there’s no shortage of incentives for saving more and spending less. Yet overall consumption continues to rise for the moment.

One reason for caution arises from the slowing trend in the private investment column of the GDP report. This measure of economic spending “comprises purchases by domestic businesses of new capital goods, such as factories and machinery,” notes economist Robert Barro in Macroeconomics: A Modern Approach. “These capital goods are durables, which serve as inputs to production for many years.” Business spending is second only to the consumer as a driver of the macro trend. But in what may be a warning sign, private domestic investment’s rate of increase slowed by roughly half in Q3, rising at just under 13% on an annualized basis—the slowest this year.

Inflation also decelerated in Q3. The price index for personal consumption expenditures rose by an annualized 0.8% during the three months through September, down from 1.0% in the previous quarter.

Overall, today’s GDP report keeps hope alive, but without softening the concerns that have triggered so much anxiety this year about the strength of the expansion. The weak rebound in job creation is still a pressing issue, and today’s macro update doesn’t offer reason to think otherwise. Still, it’s clear that the economy dodged a bullet in Q3. More of the same is probably in store for the near term.

That’s not great, but it could be worse. The real problem is that slow growth is vulnerable to unexpected shocks. The economic expansion rolls on, but it remains a precarious recovery with no immediate solution on the horizon.

“We’re just muddling along,” Ken Mayland, president of ClearView Economics, tells AP. “I think it is going to be hard to break out of this sluggish-growth rut.”

About James Picerno 894 Articles

James Picerno is a financial journalist who has been writing about finance and investment theory for more than twenty years. He writes for trade magazines read by financial professionals and financial advisers.

Over the years, he’s written for the Wall Street Journal, Barron’s, Bloomberg, Dow Jones, Reuters.

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