The Key Item That Fueled Third Quarter’s Strong GDP Growth Is Trending Down

Q3 GDP growth

Consumer spending accounted for 70 percent of the total GDP. Scott Olson/Getty Images

The U.S. gross domestic product (GDP) grew an annualized rate of 3.5 percent during the third quarter, according to the Commerce Department’s initial estimate on Friday. The number fell slightly behind the second quarter’s blockbuster 4.2 percent but still puts the economy on track to grow more than three percent for the whole year.

Consumer spending, which rose four percent during the June-September quarter, contributed 70 percent to the total GDP output. Other components include business investment, government spending and net exports of good and services.

As expected, the ongoing trade tensions, particularly with China, slowed exports during the third quarter by an annualized rate of 3.5 percent. Business investment and government spending also weakened compared to earlier periods.

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Together, these waning rates should serve as a warning sign for future economic growth, because consumer spending—the single category that fueled the third quarter’s strong growth—is slowly winding down.

On Friday, the University of Michigan published its latest consumer sentiment index, a measurement of consumer spending confidence widely used by economists, retailers and policy makers. As of October, the consumer sentiment index stood at 98.6, down from both September’s measure of 100.1 and the number a year ago (100.7).

So far, the consumer sentiment index is the highest since 2000. “Stock price declines, rising inflation and interest rates and the negative mid-term election campaigns have not acted to undermine consumer confidence,” wrote Richard Curtin, chief economist of the University of Michigan’s Surveys of Consumers program, which conducts the sentiment index calculation, in a report.

However, “consumers are not immune to these negative factors,” he warned. “The data only indicates that the tipping point toward escalating pessimism has not been reached.”

“Clearly a strong headline but the details are a little less robust,” Michelle Meyer, head of U.S. economics at Bank of America Merrill Lynch, wrote in a commentary for The New York Times on Friday. “There was very little increase in equipment investment and a decline in residential investment. And there was a particularly large increase in inventories, which is not sustainable.”

The Commerce Department will release a second estimate for the annual GDP growth on November 28.

The Key Item That Fueled Third Quarter’s Strong GDP Growth Is Trending Down