Q3 Growth Surprises to Upside

Real GDP growth rose a more-than-expected 1.9% in the third quarter. That pretty much matched the 2% gains of the second quarter. Consumer spending moderated but not as much as expected, while inventories were barely drained. That pushes off some of the weakness associated with the GM strike and tariffs into the fourth quarter. It will take well into the first quarter of 2020 to recoup all of the production losses in October and early November.

Trade placed less of a drag on growth in the third quarter than in the second quarter, but for the wrong reasons. Exports and imports both rebounded less than expected over the summer as global trade slowed.

Government spending was the second largest contributor to growth for the second consecutive quarter. The last of the federal spending stimulus from fiscal year 2019 overshadowed a slowdown in spending at the state and local levels. This is another spot to watch in the fourth quarter as Congress has yet to pass a spending bill for fiscal 2020; the federal government is currently operating under a continuing resolution, which holds spending constant, until November 21.

Another continuing resolution is expected to keep the federal government funded until late December, but another government shutdown cannot be ruled out. The administration is still fighting with Congress on ways to fund a border wall.

Bottom Line

Growth pleasantly surprised to the upside in the third quarter, which deals another blow to the rationale for a Federal Reserve rate cut today. Look for at least two dissents if the Fed decides to cut rates a third time this year; at least six of the twelve regional Fed presidents would like to see more signs that the economy is slowing before cutting again. One voting member, Charlie Evans of Chicago, has been on the fence and could dissent along with presidents Eric Rosengren of Boston and Esther George of Kansas City if the Fed moves to cut rates again today. Jim Bullard of St. Louis prefers another cut and would vote to dissent if the Fed decides not to cut rates today.

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