Republicans praised the 3.5 percent third-quarter growth rate announced Friday as more evidence that President Donald Trump's agenda of deregulations, renegotiated global trade deals, and tax cuts for individuals and corporations is working. Consumer spending probably got a boost from the individual tax cuts, but business investment - the most important factor associated with the Republican tax plan and the one that was supposed to drive a big increase in capital investment and, eventually, wages - is showing no signs of a boom.
The economy is underpinned by a $1.5 trillion tax cut and increased government spending.
The US Commerce Department figures showed lower exports weighed on growth in the quarter. Consumption has been supported in part by a tightening labor market, characterized by an unemployment rate that is near a 49-year low of 3.7 percent.
"The fate of the consumer rests with the willingness and ability of businesses to keep hiring", said Julia Coronado, president of MacroPolicy Perspectives LLC and a former Fed researcher.
Michael Feroli, an economist at JPMorgan, surmised that many businesses imported goods before they were hit by tariffs which helped boost the inventories number. "That suggests some of this stimulus won't last, it's not going to turn into higher-trend growth through the channel of investment and greater capacity and greater potential growth". The economy has reverted back to the "same old" model of consumers accounting for most of the growth.
The weaknesses in the GDP report just add to the list of worries about the economy.
They were counting on an expansion of 3.3%.
"Growth figures are likely to slow from here heading into 2019, but there are still plenty of signs of further expansion for the USA ahead", Nationwide Senior Economist Ben Ayers said via email.
The trade component reflected a widening deficit, with a 3.5% decline in exports and a 9.1% increase in imports. "Even if those paychecks aren't growing as fast as we might like, that's going to fuel economic growth and in this report, in fact, the strongest sector was consumer spending". "This report shows the fiscal stimulus has a transitory response". The second quarter's pace of growth was the best in four years. World GDP would fall further should Trump follow through on all his trade threats, including global duties on cars, the International Monetary Fund said. Nonresidential fixed investment-reflecting spending on commercial construction, equipment and intellectual property products such as software-rose only 0.8% in the third quarter after rising at a 8.7% rate in the second quarter and 11.5% in the first.
Gross domestic product - the total value of goods and services - jumped 4.2 percent in the April-to-June period.
Investors have become less sanguine on the outlook amid the latest run of USA company earnings reports, though stocks regained some ground October 25. "There's no incentive to change policy direction".
They noted that Friday's GDP report showed business investment slowed dramatically in the third quarter, growing at an annual rate of just 0.8 per cent, the weakest in almost two years, after a much stronger 8.7 per cent gain in second quarter.