The solid GDP report is raising red flags on one of Trump's signature promises about tax cuts
- The US economy expanded faster than expected in the third quarter, thanks to strong consumer spending.
- Business investment, however, showed signs of stalling even after the biggest corporate-tax overhaul in 30 years.
- Some economists see this as an early sign that company spending does not match the enthusiasm of executives that some surveys have shown.
The US economy is still in high gear, thanks to consumers who still have the means empty their wallets.
On Friday, the Commerce Department's advance reading on third-quarter gross domestic product showed the US economy grew by 3.5%, marking the fastest back-to-back periods of growth since 2014.While consumer spending soared, the timing of slowdowns in business spending and net exports last quarter raised concern with some economists about the durability of the economy's growth spurt.
Business investment in fixed structures like factories shrank by 0.04 percentage points in the third quarter, according to the early GDP reading. Although a small decline, it was the first since the fourth quarter of 2015, and occurred after the most significant corporate-tax overhaul in three decades.
"While it is still too early to come to conclusions on the relative effectiveness of the 2017 Tax Cuts and Jobs Act, there has to be some concern over this development," said Joe Brusuelas, the chief economist at RSM.
"The tax plan was essentially an enormous bet that a large, unpaid for business tax cut would result in a significant increase in productivity-enhancing investment which would the boost the long-term US growth path. This data implies that, at least for now, such a boost is not in the cards."
The drop in business investment was surprising to Ben Ayers, a senior economist at Nationwide, because surveys from business owners have been strong. In other words, there's a gap between how executives say they feel about business conditions and what they're actually doing with their money.
Additionally, a big reversal in business inventories added to growth in Q3, but the current quarter does not look promising on this front.Inventories are a volatile category of GDP and may have surged in the July-September period as companies stockpiled, bracing for the impact of US tariffs on Chinese goods. Companies may have also stockpiled on goods to meet strong consumer demand.
"Regardless of the reason, it represents a sizable asterisk for an otherwise strong quarterly growth result and creates a probable headwind to growth in the coming quarters as those inventories are trimmed back," said Jim Baird, the chief investment officer for Plante Moran Financial Advisor.
Apart from business spending, the details on trade provided another reason to raise eyebrows at Friday's GDP report.
Net exports shrank by $98.1 billion, and trade provided the biggest drag on the US economy in 33 years, according to Bloomberg. This was a reversal from the second-quarter gain, which President Donald Trump described as the "biggest and best results" from the previous GDP report.
"The swings in inventories and trade in Q4 will be smaller than in Q1, but the net effect of the two components likely will be modestly negative, reversing the small net gain in Q3," said Ian Shepherdson, the chief economist at Pantheon Macroeconomics, in a note.
"At the same time, consumption probably can't sustain 4% growth, so overall we're looking for slower GDP growth, though 3% still should be achievable."
- UBS details all the possible outcomes of the midterm elections and why a so-called blue tsunami could be the most devastating for stocks
- A fund manager who's crushing nearly all of her peers breaks down 3 under-the-radar stocks driving her strong performance