WASHINGTON (Reuters) – The US economy is expected to slow in the third quarter, hampered by a tariff-related decline in soybean exports. However, the pace should remain strong enough to meet the Trump government's 3% target this year.
FILE PHOTO: Members of a Chinese trade delegation descend from a John Deere combine during a visit to a soybean and corn farm near Norborne, Missouri, USA, August 28, 2018. Photo from August 28, 2018. REUTERS / Dave Kaup / File Photo
Gross domestic product is expected to have risen by an annualized 3.3 percent, according to a survey conducted by Reuters among economists. While this would mean a slowdown of 4.2 percent in the second quarter, it would still significantly exceed the growth potential of the economy, which economists estimate is around 2 percent.
"Given the fiscal stimulus, it will take a long time to derail this economy, and I do not think that will happen in the foreseeable future," said Ryan Sweet, senior economist at Moody's Analytics.
Economic expansion, now in its ninth year, is the second longest in history. The Commerce Department will release its snapshot of third quarter economic growth at 08:30 (1230 GMT) on Friday.
The economy is backed by a $ 1.5 trillion tax cut and higher government spending. The fiscal stimulus is part of the measures taken by the government of President Donald Trump to increase annual growth to 3 percent.
However, the government is also in a bitter trade war with China and trade disputes with other trading partners, and the slowdown in the last quarter mainly reflects the impact of the Beijing retaliation tariffs on US exports, including soybeans.
Before the tariffs came into force at the beginning of July, farmers began shipping to China, boosting growth in the second quarter. Since then, soybean exports have been decreasing every month, increasing the trade deficit.
Economists estimate that the growing trade gap has cut nearly 2 percentage points of GDP growth in the third quarter, reversing the contribution of 1.22 percentage points between April and June.
However, the decline in trade was probably offset by faster inventory retention by companies before US import tariffs, mainly for Chinese goods, came into effect. Inventory spending is expected to have increased GDP growth by 2 percentage points, after cutting 1.1 percentage points from production in the second quarter.
TRADE, INVENTORY SWINGS
"The major trade and stock swings between the second and third quarters are likely to be at least partially due to changes in trade policy," said Daniel Silver, an economist at JP Morgan in New York.
Excluding the impact of trade and stock, economists estimate GDP in the third quarter at 2.8 percent, up from 4.0 percent in April-June.
Solid third-quarter growth should enable the Fed to raise interest rates again in December, despite the recent worsening of financial market conditions as a result of stock market sell-offs and rising US Treasury yields.
The Fed raised interest rates for the third time this year in September, removing a reference to "expansive" monetary policy from its policy statement.
Consumer spending growth, which accounts for more than two-thirds of the US economy, is expected to have been strong in the third quarter after a 3.8 percent increase in the second quarter. Consumption was partially supported by a worsening labor market characterized by an unemployment rate close to a 49-year low of 3.7 percent.
Equipment investment is also likely to have supported growth in the third quarter. But headwind builds up. Higher interest rates are pushing the housing market, businesses are struggling to find workers, and import duties are increasing manufacturing costs for companies such as Caterpillar Inc (CAT.N.), 3M Co (MMM.N) and Ford Motor Co (F.N).
"We expect that stronger growth will gradually ease in the first half of 2019 in the second half of the year as government spending, corporate earnings and disposable income weaken as fiscal stimulus eases," said Sam Bullard, senior economist Wells Fargo Securities in Charlotte, North Carolina.
Reporting by Lucia Mutikani; Editing by Tomasz Janowski