U.S. Economy Notches Fastest Growth Rate in Two Years

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Economic growth got a jolt of momentum in the third quarter thanks to a rebound in private-inventory investment and export acceleration, which offset a decline in consumer spending.

Gross domestic product, a broad measure of goods and services produced across the U.S. economy, grew at an annualized pace of 2.9% during the third quarter, topping expectations for a 2.5% rate, according to data released by the Commerce Department on Friday. The third-quarter pace was the fastest in two years, and up from an annualized rate of 1.4% notched in the prior quarter.

“This shows that the U.S.is roughly back on track,” Luke Bartholomew, Aberdeen Asset Management fixed income investment manager said. “It’s a natural bounce back following a pretty underwhelming year so far.”

Private inventories, which have been a drag on GDP for the last five quarters, rebounded over the three-month period as they rose by $12.6 billion, or 0.61%. Meanwhile, exports surged at an annualized rate of 10% thanks in part to a jump in soybean exports to South America after the region experienced heavy rains and adverse weather conditions.

While inventories data are subject to volatile swings from quarter to quarter, the strong showing in this report was a positive sign, according to Andy Kapryn, director of research at Regent Atlantic.

“They indicate whether businesses are getting ready for a surge in demand, or if they’re going to hunker down and avoid overextending themselves and then have to sell goods below cost. The fact that last quarter it was a negative contributor to growth and it’s surged back to being a positive one is good news.”

It’s not just businesses feeling more confident, consumers were also a factor that helped drive economic expansion in the third quarter, though they contributed less to growth than in the previous three-month period. Consumer spending grew at a rate of 2.1% in 3Q, down from the 4.3% rate in the prior quarter. Still, despite the slide, Kapryn said after a weak showing from consumers in the wake of the Great Recession, positive momentum should be cheered.

“The consumer is the single biggest driver of the economy and they took so many years off after the recession. It’s not a surprise they’re the strongest part, because if you look at consumer confidence which asks how they feel about economic prospects and wage growth, for the first time since 2007, we’re on a positive outlook among the average American,” he explained.

Helping consumers was a tick up in real disposable personal income which saw a 2.2% gain, slightly more than the 2.1% pick up from the second quarter.  Also contributing to overall economic growth during the quarter was a shallower contraction in residential fixed investment, which contracted at an annualized rate of 6.2% compared with a 7.7% rate in the second quarter. Economists at Goldman Sachs (NYSE:GS) said the back-to-back quarters of decline, though, likely overstate the slowdown in new construction activity during the middle part of the year as the decline partly reflected a drop in the dollar value per unit rather than the number of units built. According to their data, fewer expensive homes were constructed during the first half of the year than in the last half of 2015. With the value of units under construction near lows, the economists don’t anticipate a continued drag on residential investment in the near term.

With a strong showing from overall economy in the third quarter, Wall Street is closely eyeing the data-dependent Federal Reserve’s policy meeting set for next week. According to federal funds futures, a tool used to predict market expectations for changes in monetary policy, odds remain low, at 9.3%, for a rate rise at the November meeting, though they rose following the GDP report from 8.3%. Expectations for a December rate hike are significantly higher at 78.5%.

Aberdeen’s Bartholomew said the GDP report, while important, didn’t move the needle on the outlook for Fed rate hikes.

“November is definitely off the table. There’s no chance of them going then. The broader outlook doesn’t really change…inflation is still really picking up, unemployment is pretty impressive. So, those fundamentals that they focus on rather than the volatile quarterly GDP series,” he explained.

The core personal consumption expenditure (PCE)  price index, a measure closely eyed by the Fed, which measures prices paid for goods and services, dipped in the third quarter to 1.7% from 1.8% in the second quarter.