US: Another strong quarter of growth – NAB

GDP grew strongly in the September quarter and, despite hurricane activity, was similar to the previous quarter’s growth and the details of the report were also reasonable, explains Tony Kelly, Senior Economist at NAB.

Key Quotes

“The result supports our view that the economy is growing at an above trend rate. At the margin, it is likely to increase the chance that the Fed will raise rates in its December meeting.”

“US GDP grew by 0.7% qoq, or 3.0% on an annualised basis, in the September quarter 2017. This was despite the major hurricanes that occurred during the quarter. The annual growth rate (September 2017 on September 2016) was the strongest in 2 years at 2.3% yoy. That said, this rate of growth is only marginally higher than the post-GFC average and by historical standards growth remains moderate.” 

“The strength in September quarter was the more impressive for occurring despite significant hurricane disruptions. As it was stronger than we had expected, our forecast for 2017 has been revised up to 2.2% (from 2.1%). However, it doesn’t fundamentally alter our view of the economy and we have maintained our forecast of 2.3% for 2018.” 

“It is worth remembering that GDP is quite volatile on a quarter-to-quarter basis. In particular, the weakness in March quarter GDP was discounted on the basis that it might reflect seasonal adjustment issues. If true, then this would mean that growth would be artificially high in the rest of the year.” 

“Our view is that the economy is growing at an above trend level which should lead to further a decline in the unemployment rate from its already low level, providing some added inflationary pressures over time.” 

“The main takeaway from the Q3 GDP result is additional support for this view. Importantly, given the statistical volatility noted above, it is also supported by independent data sources – business survey measures are at solid levels and consumer confidence remains relatively high.” 

“One issue that bears close watching is the downwards movement in the savings rate, although the rate of decline has slowed recently. The savings rate is at its lowest level since 2007 and there is a limit to how far it can fall. One possible reason for the decline is that, with confidence high and balance sheets (on average) in good shape, households have been unwinding the increase in savings that followed the GFC.” 

“At the margin, the strong growth in September quarter GDP adds to the likelihood of the Fed raising rates in its December meeting (the chance of any change in policy at this week’s meeting looks remote). One reason that the Fed has not materially changed its outlook for the fed funds rate over this year in the face of weakening inflation is that it sees future inflationary pressure from the continuing falls in the unemployment rate, a trend the strong GDP report suggests will continue.”