US economy maintains brisk growth rate despite hurricane-related damage and decline in construction

The report will probably have no impact on monetary policy in the near term

Lucia Mutikani
Washington DC
Friday 27 October 2017 13:59
A slowdown related to Hurricane Irma - which hits part of Florida - and Hurricane Harvey was offset by other areas of the economy
A slowdown related to Hurricane Irma - which hits part of Florida - and Hurricane Harvey was offset by other areas of the economy

The US economy unexpectedly maintained a brisk pace of growth in the third quarter as an increase in inventory investment and a smaller trade deficit offset a hurricane-related slowdown in consumer spending and a decline in construction.

Gross domestic product increased at a 3 per cent annual rate in the July-September period after expanding at a 3.1 per cent pace in the second quarter, the Commerce Department said.

The department said while it was impossible to estimate the overall impact of hurricanes Harvey and Irma on third-quarter GDP, preliminary estimates showed that the back-to-back storms had caused losses of $121 billion in privately owned fixed assets and $10.4 billion in government-owned fixed assets.

Harvey and Irma struck parts of Texas and Florida in late August and early September. Hurricane Maria, which destroyed infrastructure in Puerto Rico and the Virgin Islands, had no impact on third-quarter GDP growth as the islands are not included in the United State’s national accounts.

Economists polled by Reuters had forecast the economy growing at a 2.5 per cent pace in the third quarter. Excluding inventory investment, the economy grew at a 2.3 per cent rate, slowing from the second quarter’s 2.9 per cent pace.

With post-hurricane labour market, retail sales and industrial production data already showing an acceleration in underlying economic activity, Friday’s report will probably have no impact on monetary policy in the near term.

Federal Reserve Chair Janet Yellen cautioned last month that economic growth in the third quarter “will be held down” by the severe disruptions caused by the hurricanes.

The US central bank is expected to increase interest rates for a third time this year in December.

The economic recovery since the 2007-2009 recession is now in its eighth year and showing little signs of fatigue. The economy is being powered by a tightening labour market, which has largely maintained a strong performance that started during former President Barack Obama’s first term.

Though US stocks have risen in anticipation of President Donald Trump’s tax reform, the administration has yet to enact any significant new economic policies. Mr Trump wants big tax cuts and fewer regulations to boost annual GDP growth to 3 per cent.

Businesses accumulated inventories at a $35.8 billion pace in the third quarter in anticipation of strong demand. As a result, inventory investment contributed 0.73 percentage point to third-quarter GDP growth, after adding just over a tenth of a percentage point to growth in the prior period.

Exports increased at a 2.3 per cent rate in the third quarter, while imports fell at a 0.8 per cent pace. That left a smaller trade deficit, leading to trade adding 0.41 percentage point to GDP growth. Trade has contributed to output for three quarters in a row.

Hurricanes Harvey and Irma, which hurt incomes and undercut retail sales in August, crimped consumer spending in the third quarter. Growth in consumer spending, which accounts for more than two-thirds of the US economy, slowed to a 2.4 per cent rate following a robust 3.3 per cent pace in the second quarter.

The storms also weighed on investment in nonresidential structures like oil and gas wells. Spending on mining exploration, wells and shafts grew at a 21.7 per cent rate, decelerating from the second-quarter’s 116.3 per cent pace.

As result, spending on residential structures fell at a 5.2 per cent pace in the third quarter after rising at a 7.0 per cent rate in the second quarter.

Investment in homebuilding, which was already undermined by land and labuor shortages, also took a hit from Harvey and Irma. Spending on residential construction declined at a 6 per cent rate, contracting for a second straight quarter.

Business investment on equipment rose at an 8.6 per cent rate, increasing for a fourth straight quarter. Government investment fell for a third straight quarter.


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