Third Quarter GDP Report – Growth Remains on Solid Footing, But Headwinds Emerging

Q3 GDP 2018 Chart

Gross Domestic Product (GDP) grew by 3.5% in the third quarter, ahead of estimates which called for growth of 3.3%. Consumer spending, which accounts for over two thirds of the U.S. economy, grew by 4% - its strongest level since 2014. A robust labor market and record high consumer confidence are clearly leading consumers to spend. Government expenditures were also a positive contributor to growth, increasing by 3.3%, up from 2.5% in the second quarter. Despite these two factors driving the headline number higher, there were signs of weakness in some sectors of the economy. Residential investment contracted by 4%, its third consecutive quarterly decline. This weakness comes on the heels of a slowdown in many housing related indicators in the last few months. Higher interest rates and input costs seem to be starting to weigh on the housing market. Nonresidential business investment was also disappointing, growing at only 0.8%. This is underwhelming given an expected boost to business investment that was supposed to come on the heels of this year’s tax cuts. Finally, the always volatile inventory and net exports numbers added 2.1% and subtracted 1.8%, respectively. Overall it was a solid GDP report, despite the pockets of weakness. However, as this year’s fiscal stimulus begins to fade over the next few quarters and higher interest rates continue to provide a headwind, we expect growth to slow as we move into 2019.