February 16, 2019

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G.D.P. Report Quarter 3: Here’s What to Watch For

G.D.P. Report Quarter 3: Here’s What to Watch For
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The Commerce Department will release its initial estimate of third-quarter economic growth at 8:30 a.m. on Friday, providing the latest snapshot of the American economy. Here’s what to watch for.

The economy continued to steam ahead last quarter, with analysts on Wall Street expecting an annualized growth rate of 3.3 percent. That would put the gross domestic product on track for its best yearly performance since 2005.

While that would represent a falloff from the white-hot pace of growth in the second quarter, the economy is doing well by just about any measure. Stimulus from Washington in the form of tax cuts and increased government spending is turbo-charging growth, but it won’t last forever.

“Over all the economy has very solid momentum but the underlying data tell us that the boost from fiscal stimulus is likely to be temporary,” said Michael Gapen, chief United States economist at Barclays.

Consumers remain the bedrock of the economy. And at least for now, fiscal policy is helping that. “What’s most notable is the strength in consumer spending,” said Michelle Meyer, head of United States economics at Bank of America Merrill Lynch. “The consumer had momentum coming into the year and the tax cuts further fueled that.”

After the blockbuster 4.2 percent growth rate recorded in the second quarter, most economists expected the economy to slow. Although the third quarter’s rate of expansion will be lower, it’s looking stronger than was initially expected.

When Macroeconomic Advisers, a widely followed research firm in St. Louis, began tracking third-quarter growth in late July, its forecast came in at just under 3 percent. By Thursday, the firm was pegging growth at just under 4 percent. “We expected more of a slowdown than what we’re seeing,” said Ben Herzon, executive director of Macroeconomic Advisers.

Besides the tailwind from Washington, consumers remain optimistic, and much of the gain last quarter came from spending by individuals and families. Mr. Gapen is less sanguine about business spending, which surged in the first quarter, but appears to have slowed since then. “If you’re banking on strong G.D.P. growth, you need business investment,” he said.

Inventories, which are volatile and often hard to predict, are expected to lift growth in the third quarter.

President Trump has not been shy about claiming credit for the strong economy, even though many trends, like falling unemployment, were firmly in place under his predecessor, Barack Obama. Still, with less than two weeks to go before the crucial midterm congressional elections, the strong growth in recent quarters will most likely be used by Republicans on the campaign trail to buttress claims that they have been good stewards of the economy.

Another wild card is the effect from one of Mr. Trump’s leading economic moves, namely increasing tariffs on $250 billion worth of Chinese imports. The president has also raised tariffs on imports from elsewhere, including on products like steel, aluminum and solar panels. So far, there is little evidence that the administration’s trade policies have reduced growth much.

However, trade has a way of making itself felt. A surge in soybean purchases by buyers seeking to act before retaliatory Chinese tariffs kicked in helped lift growth by about half a percentage point in the second quarter, economists say. That blip is expected to reverse in the second and third quarters. But as more time passes, the headwinds from tariffs will mount.

Policymakers at the Federal Reserve have been gradually raising interest rates, in order to prevent the economy from overheating and to head off inflation.

That has irked Mr. Trump, who criticized the chairman of the Fed, Jerome Powell, on Tuesday. “Every time we do something great, he raises the interest rates,” Mr. Trump said.

Officials at the central bank, who do not report to the president, like to consider themselves as being above politics. Mr. Trump’s public attack is highly unusual, and the latest G.D.P. data could give the president more reason to unload on Mr. Powell.

The Fed is expected to raise rates once more this year, in December, and several times in 2019. Mr. Trump may continue to complain, but the Fed, and Mr. Powell, are likely to stay the course.

It might seem odd that the Standard & Poor’s 500-stock index has fallen about 7 percent in October even as the economy has been strengthening.

In fact, the two are linked, but not in the way you might think. A stronger economy tends to push up interest rates, which, in turn, puts downward pressure on stocks. The yield on the 10-year Treasury note has been climbing, which makes riskier stocks less appealing to investors. It also increases borrowing costs for businesses and consumers.

Wall Street’s recent decline, which began in early October, was too late to have any effect on sentiment or spending in the third quarter, which covers July, August and September.

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