U.S. Economy Grew at a Solid Pace in Q3 2014

Most spending components registered positive growth in Q3. Real final sales grew at its strongest rate in nearly four years. The expansion is becoming increasingly self-sustaining.

Underlying Details Reflect Solid Economic Growth

U.S. real GDP rose at an annualized rate of 3.5 percent in the third quarter relative to the previous quarter, which was a bit stronger than most analysts had anticipated (top chart). Not only did the solid outturn come on the heels of the 4.6 percent rate that was registered in Q2, but the underlying spending details in the Q3 data show that the U.S. economy has a fair bit of momentum behind it at present.

Real personal consumption expenditures rose at a modest pace of only 1.8 percent in Q3, as growth in services continued to be weak. Some of the tepid growth in services reflects weakness in utilities consumption (the summer was unseasonably mild in many parts of the United States). However, durable goods consumption was very strong, rising 7.2 percent on the back of very strong growth in auto sales. 

Private fixed investment spending grew at a solid rate of 4.7 percent as nonresidential investment spending rose 5.5 percent. The 1.8 percent increase in residential investment spending looks disappointing, but it followed strong growth (8.8 percent) in Q2. Even the government, which has generally been a drag on real GDP growth over the past few years, got into the act, with public consumption and investment expenditures rising 4.6 percent (middle chart). This outturn was the strongest annualized growth rate since Q2-2009 when the American Recovery and Reinvestment Act (i.e., the “stimulus program”) first started to kick in. 

The strong contribution from the foreign sector—net exports contributed 1.3 percentage points to the topline growth number—was partially offset by the 0.6 percentage point drag from inventories. These components can be volatile on a quarterly basis, and we expect that net exports will exert a small drag on growth in Q4 while inventories likely will be a net contributor. To get a sense of the underlying growth pace of the economy, economists generally look to growth in real final sales. In that regard, real final sales rose 4.2 percent in the third quarter, the strongest pace of growth in nearly four years (bottom chart).

Economic Outlook is Reasonably Solid

We look for real GDP growth in Q4 to downshift a bit relative to Q3. That said, we believe that the expansion is becoming more and more self-sustaining, and we forecast that real GDP will grow roughly 3 percent per  annum in both 2015 and 2016. If realized, that would be the strongest two-year period of real GDP growth for the U.S. economy since the middle of the 2001-07 economic expansion. The Federal Reserve made it clear yesterday that it is moving, if only slowly, toward normalization of monetary policy. The GDP data for Q3 show that the U.S. economy is becoming a bit more “normal” as well.