Consumers, exports give US economy muscle in the third-quarter

The US economy grew faster than initially estimated in the third quarter (Q3), notching its best performance in two years, buoyed by strong consumer spending and a surge in soybean exports.

In a separate report, US home prices rose 5.5% in the year to September, meaning house prices overall have now fully recovered from their plunge during the 2008 financial crisis. 

A third report showed US consumer confidence rebounded in November to its highest level in nine years despite uncertainty surrounding the policies of President-elect Donald Trump. 

US stock prices edged higher on Tuesday after the data, with the benchmark S&P 500 index now up about 6.0% since the November 8 elections. The US Treasury yields ended slightly lower on Tuesday but the benchmark ten year note yield has risen about 0.5% in the past two weeks, helping to push the US dollar up to its highest levels in more than a decade against major currencies.  

US Economic Growth Fastest Since 2014

US gross domestic product (GDP) increased at a 3.2% annual rate instead of the previously reported 2.9% pace, the Commerce Department said in its second GDP estimate on Tuesday. Economists had forecast third-quarter (Q3) GDP growth being revised up to a 3.0% rate.

Growth was the strongest since the third quarter (Q3) of 2014 and followed the second quarter`s (Q2) anaemic 1.4% pace. Output was lifted by upward revisions to business investment and home building. 

Exports grew at their quickest pace since the fourth quarter (Q4) of 2013, driven by a surge in soybean exports after a poor soy harvest in Argentina and Brazil. International trade contributed 0.87% point to GDP growth and not 0.83% point as reported last month. 

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Data ranging from housing to retail sales and manufacturing output also suggest the economy retained its momentum early in the fourth quarter (Q4) even as exports appear to be faltering amid a reversal of the boost to growth provided by soybean exports in the third quarter (Q3). 

The Atlanta Fed is currently forecasting GDP rising at a 3.6% rate in the fourth quarter (Q4), supporting market expectations that the US Federal Reserve will raise interest rates next month.

Economic growth could also be supported next year if President-elect Donald Trump succeeds in pushing through Congress a fiscal stimulus plan that includes massive infrastructure spending and tax cuts, analysts said.

"Couple that with an increasingly enthusiastic consumer supported by stronger wage gains and the economy appears well-positioned to remain on a growth path heading into 2017," said Jim Baird, chief investment officer at Plante Moran Financial Advisors in Kalamazoo, Michigan.

When measured from the income side (GDI), the economy grew at a 5.2% clip amid a rebound in corporate profits. That was the fastest pace of increase in gross domestic income (GDI) in nearly two years and followed a 0.7% rate of expansion in the second quarter (Q2). 

The average of GDP and GDI, which economists consider to be a more accurate measure of current economic growth and a better predictor of future output, increased at a 4.2% rate in the third quarter (Q3), the fastest pace in two years. 

That followed a 1.1% rate of increase in the second quarter (Q2) and likely exaggerates the economy`s strength.

Consumer Spending And Confidence Up

The Commerce Department said consumer spending, which accounts for more than two-thirds of US economic activity, increased at a 2.8% rate in the third quarter (Q3) and not the 2.1% pace reported last month. That was still a slowdown from the second quarter`s (Q2) robust 4.3% pace.

With a tight labour market lifting wage growth and boosting household sentiment, consumer spending is likely to gain further momentum for the rest of the year and in 2017. 

A separate report from the Conference Board showed its consumer confidence index surged in November, climbing back to levels seen before the 2008 recession. Consumers were upbeat about the labour market and current business conditions.

Rising house prices are also likely to keep consumption supported. The Standard & Poor`s CoreLogic Case-Shiller national home price index rose 5.5% in the year to September and is now just above the peak seen in July 2006.

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Business Spending Mixed

Spending on non-residential structures, which include oil and gas wells, was revised sharply higher to show it increasing at its fastest pace since the first quarter (Q1) of 2014. 

Business spending on equipment, however, fell at a steeper rate than previously reported, declining for a fourth straight quarter. With after-tax corporate profits rising at a 7.6% pace last quarter there is scope for business investment to rebound. Corporate profits declined at a 1.9% rate in the second quarter (Q2).

"The return to positive growth in corporate profits at least satisfies what is probably a necessary, but not sufficient, condition for a rebound in business fixed investment," said Andrew Hollenhorst an economist at Citigroup in New York.

Businesses increased spending to restock after running down inventories in the second quarter (Q2), but just not as much as previously reported. Businesses accumulated inventories at a $7.6 billion rate in the last quarter, almost half of the $12.6 billion pace reported last month. 

That means inventory accumulation contributed 0.49% point to GDP growth and not the 0.61% point reported last month.

The third-quarter revision showed a much more favourable growth profile for the economy, analysts said. The boost from inventories was not as big as previously estimated, which suggests that businesses are not sitting on piles of unwanted goods. 

This means businesses will have more scope to place new orders, which augurs well for economic growth in the coming quarters. The sharp acceleration in GDP in the last quarter should quash any lingering fears that the economy was at risk of stalling after growth averaged just 1.1% in the first half.

That together with a labour market that is near full employment and slowly rising inflation could leave the US Fed comfortable with raising hike interest rates at its December 13 and 14 policy meeting. The US central bank raised its overnight benchmark interest rate last December for the first time in nearly a decade.