Wednesday, 22 of November of 2017

Economics. Explained.  


October 27, 2017

The initial estimate of third quarter GDP growth came in at 3.0% which was higher than expected given the negative impact from Hurricanes Harvey and Irma.  That compares to a 3.1% pace in the second quarter.

Final sales, which is GDP excluding the change in business inventories grew at a 2.3% pace in the third quarter compared to a 2.9% rate in the second quarter.   Over the past year final sales have risen 2.2%.  In the second quarter inventories rose $35.8 billion compared to an increase of $5.5 billion in the second quarter.  Thus, inventories  added 0.7% to  GDP growth in the third quarter.  Inventories are expected to rise at roughly that same pace in the quarters ahead.

Final sales to domestic purchasers excludes both the change in inventories and trade rose 1.8% in the third quarter versus an increase of 2.7% in the second quarter.  Over the past year this series has risen at a 2.s% pace.  The deficit for net exports narrowed by $18.1 billion which means that the trade component added 0.5% to GDP growth  in the third  quarter as exports rose 2.3% while imports declined 0.8%.  The drop in imports probably represents an inability to offload merchandise in the Houston area in the wake of Hurricane Harvey.

Consumption spending rose 2.4% in the third quarter after having jumped 3.3% in the second quarter.  Growth in this category was almost certainly biased downwards by the two hurricanes and will rebound in the quarters ahead.  We expect the pace of consumer spending to remain steady and  increase 2.6% in 2018.  Solid employment gains should boost  income.  The rising stock market will boost net worth.  Expected individual income tax cuts should further stimulate spending.  Everything related to the consumer seems quite solid.

Nonresidential investment climbed by 3.9% in the third quarter after rising 6.7% in the second quarter and 7.2% in the first quarter.  We expect nonresidential invest to  increase 5.5% in 2017 and  4.9% in 2018 as business regains confidence in the wake of expected corporate tax cuts, relief from the currently onerous regulatory burden,  and some repatriation of earnings from overseas.

Residential investment declined 6.0% in the third quarter after having fallen 7.3% in the second quarter.   The third quarter drop was probably exacerbated by the hurricanes.  While demand remains strong, builders are having an increasingly difficult time finding qualified workers which curtails growth in this category.   We expect residential investment to  increase 4.1% in 2018.

The foreign sector as measured by the deficit for real net exports narrowed by $18.1 billion in the third quarter to -$595.5 after having narrowed by $8.6 billion in the second quarter.  Exports rose 2.3% while imports declined by 0.8%.  We expect the deficit for net exports to neither add to nor subtract from GDP growth in 2018.

Federal government spending rose 1.1% in the third quarter after having climbed by 1.9% in the second quarter.  Federal government spending is expected to rise 0.6% in 2017 and 2.9% in 2018 as President Trump increases defense spending while non-defense spending is relatively unchanged.

We expect GDP growth of  2.6% this year, and 2.8% in 2018 given expected individual and corporate tax cuts and some repatriation of earnings from overseas.

Stephen Slifer


Charleston, SC

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