Overall economic activity in the third quarter continued to decelerate with the top-line estimate indicating a 1.9% increase in growth and a 2% gain on a year-ago basis. Real final sales clocked in at a 2% increase as did final sales to domestic purchasers and gross domestic purchases. Digging through the depths of the government’s report, it appears that the first estimate of personal consumption, a 2.9% gain, and the $69 billion increase in inventories, are not well aligned with high frequency data published over the past few weeks. As a result, we anticipate further downside revisions to the second and third estimate of GDP over the next few months back toward 1.5%. Any way one slices this data set, one thing is clear: the U.S consumer is keeping the economy from sliding toward stall speed.
Growth data in the third quarter was such that we do not think that this will prove decisive ahead of the impending Federal Open Market Committee rate decision this week. In our estimation, broad weakness across business investment, deceleration in overall consumer spending and the risks around trade policy are such that the central bank will likely adopt a posture of constructive ambiguity and reserve the option of reducing the federal funds rate when it meets again in December, following the widely anticipated cut at its October meeting.
The composition of the report was decisively tilted toward household consumption, which was driven by a 5.5% increase in purchased goods, a 7.6% gain in outlays on durables, a 4.4% rise in nondurables, a 1.7% gain in service spending, and a 2% boost in government spending. Perhaps, more encouraging given the prior Fed rate cuts this year, outlays on residential spending rose 5.1%, the first increase in six quarters.
Beyond that, that data turns a bit darker. Gross private investment declined by 1.5%, the second straight quarter of contraction. Fixed investment declined 1.3%, and outlays on nonresidential investment fell 3%. Inside the residential category, outlays on structures dropped a whopping 15.3%, and spending on productivity enhancing equipment fell 3.8%. The only positive in the capital expenditure category is the 6.6% increase in outlays on intellectual property. Exports increased 0.7% and imports rose 1.2%.