US Q3 GDP: Economy expected to sustain solid real growth ahead - Wells Fargo

Analysts from Wells Fargo, point out that today’s 3% US Q3 GDP reading showed some evidence of temporary moderation due to storms, but the economy is expected to sustain solid real growth in the fourth quarter and for 2018. 

Key Quotes: 

“In the third quarter, spending by the consumer and business slowed as real final sales came in at 2.3 percent compared to a gain of 2.9 percent in the second quarter and 1.9 percent for 2016. Government was a small drag on growth. In perspective, real GDP growth has averaged 2.7 percent since 1982, although the pace of growth in the current expansion is only 1.7 percent, down from 2.6 percent in the prior expansion. Going forward for real GDP, we expect a gain of 2.6 percent in the fourth quarter and 2.4 percent for 2018.”

“Consumer spending grew at 2.4 percent in the third quarter (3.3 percent in Q2) with gains in durables but slower in non-durables and services relative to their Q2 pace. This moderation is consistent with the slower pace of real disposable income and a modest hurricane effect. For investment, equipment was solid but structures fell while another real hit came in for residential investment (hurricane impact in TX and FL), which fell for the second quarter in a row. For the government sector, the real story is a second quarter of decline in state & local spending.”

“Overall GDP prices came in at 2.2 percent in the Q3, with the PCE deflator coming in at 1.5 percent, below the FOMC’s 2 percent target. Inflation, as measured by the PCE deflator, is not mean reverting, in fact, the pace of inflation has trended down since 1982. The PCE deflator has averaged 2.4 percent since 1982, 1.8 percent since 1994 (NAFTA) and 1.5 percent in the current recovery.”

“This pace of GDP growth would bring forth an FOMC increase in the fed funds rate in December and again one move in the first half of 2018 as well as a modest rise in the benchmark two and ten year Treasury rates.”