U.S. Growth at Above-Forecast 3% on Consumers and Businesses

The U.S. economy expanded at a faster pace than forecast in the third quarter, indicating resilient demand from consumers and businesses even with the hit from hurricanes Harvey and Irma, Commerce Department data showed Friday.

Key Takeaways

While GDP grew more than anticipated, analysts look to another key measure to assess the true health of the economy. Final sales to domestic purchasers, which strip out trade and inventories — the two most volatile components of the GDP calculation — climbed 1.8 percent, the slowest since early 2016, after rising 2.7 percent in prior quarter.

The fallout from the hurricanes was mixed, probably depressing some figures while lifting others. The storms inflicted extensive damage on parts of Texas and Florida, though the effect is likely to be transitory as economic activity is expected to rebound amid rebuilding efforts.

Consumer spending, which accounts for about 70 percent of the economy, added 1.6 percentage point to growth last quarter. That was driven by motor vehicles, as Americans replaced cars damaged by the storms, while services spending slowed to the weakest pace since 2013. Even so, a steady job market, contained inflation and low borrowing costs are expected to provide the wherewithal for households to sustain their spending.

The first reading of GDP, the value of all goods and services produced, also showed continued strength in business investment, indicating growth is broadening out to more sources beyond household consumption. Companies are upbeat about the outlook and overseas markets are improving, which may help boost exports and contain the trade deficit.

At the same time, the details of business investment showed a mixed picture. The decline in investment in structures probably reflects the hit from Hurricane Harvey, especially on oil and gas drilling.

Residential investment remained a weak spot. Builders are up against a shortage of qualified labor and ready-to-build lots at the same time sales are being held back by a shortage of available properties that’s driving up prices.

Price data in the GDP report showed inflation picked up while still lagging behind the Federal Reserve’s 2 percent goal. Excluding food and energy, the Fed’s preferred price index — which is tied to personal spending — rose at a 1.3 percent annualized rate last quarter, following a 0.9 percent gain.

Fed policy makers can point to evidence that growth is steady enough to allow them to keep raising interest rates, with investors expecting a quarter-point increase in December.

While the economy is probably on solid footing in the ninth year of this expansion, the central bank and many economists expect GDP growth to slow beyond 2018, moving closer to 2 percent rather than the sustained 3 percent pace that the Trump administration says will happen if its tax plan is enacted.

Economist Views

“It’s hard to confidently discern the hurricane effects in this report, but the economy seems to be on pretty solid ground,” said Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York. “The details are reasonably solid. Consumers stepped down a little from the second quarter but their spending still expanded at a decent pace.”

The gain in equipment investment shows “businesses may be getting a little more confident about the expansion, both here in the U.S. and abroad,” he said. Overall, the report “probably gives a little more confidence to the Fed to hike rates before year-end, but I don’t think it’s a game-changer.”

Other Details

  • Nonresidential investment — which includes spending on equipment, structures and intellectual property — increased 3.9 percent and added 0.49 percentage point to growth
  • Equipment investment jumped 8.6 percent for a fourth quarter of growth, longest streak since 2014
  • Residential investment fell at a 6 percent rate after 7.3 percent drop, worst two-quarter performance since 2010
  • Net exports added 0.41 percentage point to growth as exports rose, imports fell; inventories added 0.73 point, most since 2016
  • Government spending fell at a 0.1 percent rate; the figures reflected 1.1 percent in federal spending, driven by defense, while state and local outlays dropped 0.9 percent
  • After-tax incomes adjusted for inflation increased at a 0.6 percent annual pace, down from the previous quarter’s 3.3 percent; saving rate fell to 3.4 percent from 3.8 percent
  • GDP report is the first of three estimates for the quarter; the other two are due in November and December as more data become available

    Highlights of Third-Quarter GDP (First Estimate)

    • Gross domestic product grew at a 3% annualized rate (est. 2.6%) following a 3.1% gain in 2Q, best back-to-back quarters since 2014
    • Consumer spending, biggest part of the economy, grew 2.4% (est. 2.1%) after 3.3% in 2Q
    • Business fixed investment rose 1.5%, adding 0.25 ppt to growth; spending on nonresidential structures fell, equipment and intellectual property gained, residential dropped
    • Trade, inventories added a combined 1.14 ppt to growth
    • Commerce Dept. said it can’t estimate hurricanes’ impact on GDP; disaster losses on fixed assets, private and public, totaled about $131.4b

    Read more: http://www.bloomberg.com/news/articles/2017-10-27/u-s-growth-at-above-forecast-3-on-consumer-business-spending

    Banks Pine for Loan Growth as Clients Wait on Trumps Promises

    President Donald Trump’s pledges to overhaul taxes, trade, infrastructure and health care may thrill some corporate leaders, but it’s causing many to delay expansions. That’s bad for banks.

    Lending growth probably decelerated for a fourth straight quarter in the three months ended Sept. 30 across more than a dozen of the biggest U.S. banks, according to Royal Bank of Canada analysts and Bloomberg calculations. Their total loans may have ticked up just 1.8 percent, the smallest increase in more than two years, as commercial and industrial customers held off on buying equipment and building plants.

    Executives are “hesitant to borrow in the face of uncertainty,” said Jason Goldberg, an analyst at Barclays Plc. “Whether it’s potential tax reform, health-care uncertainties, or they’re unclear what infrastructure spending is going to look like, you’ve definitely seen corporates take a pause.”

    Washington’s inaction has been frustrating bankers for months, a sentiment that may surface anew when they start posting quarterly results this week. During the last round in July, JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon lashed out, saying, “There would be much stronger growth if there were more intelligent decisions and less gridlock.” In June, Bank of America Corp. Chief Operating Officer Thomas Montag said corporate clients need clarity to make big investment decisions.

    Trump and his top economic adviser, Gary Cohn, have said they expect the financial industry to help fund growth. But instead, a dearth of progress on big legislation has stymied that business.

    Congressional Republicans spent much of September trying to resurrect a failed health-care bill. Then Trump told lawmakers his $1 trillion infrastructure plan may not rely on public-private partnerships, potentially throwing a wrench into a key priority. The president also released a tax plan that many analysts consider unlikely to win support until designers can prove it won’t balloon the federal deficit.

    For banks, the uncertainties are compounding challenges in lending, which also is being constrained by tighter regulation and slower-than-expected interest-rate hikes — factors that have crimped trading revenue too. Low yields have encouraged firms to issue bonds and use the proceeds to repay bank loans, said Alison Williams, an analyst at Bloomberg Intelligence. U.S. Bancorp CEO Andrew Cecere addressed the challenges at an investor conference last month.

    “With the low yield curve, there was a lot of debt issuance, and that debt issuance was used to pay down some bank lending,” he said. In addition, “there was some more uncertainty that entered the market because of some of the slowdown in the perceived timing of tax policy and trade policy and regulation,” slowing companies’ capital expenditures.

    ‘Mental Signal’

    Corporate executives’ outlook for the next six to 12 months deteriorated in July and August, with some respondents citing heightened policy uncertainty, the Federal Reserve Bank of Chicago said last month. The number of workers on U.S. payrolls declined in September for the first time since 2010, reflecting major disruptions from hurricanes Harvey and Irma.

    For now, bank investors are willing to look beyond that. The 24-company KBW Bank Index surged more than 30 percent from the November election to early March on optimism that Trump’s administration will eventually ease bank regulation, reignite inflation and drive up interest rates. The rally resumed in September as attention shifted to taxes.

    “People were underweight financials for a long time,” said Chris Whalen, an independent analyst and consultant. “When Trump got elected that was a mental signal for these guys that we should increase our allocation.”

    Investors continue to see reasons for optimism. Trump’s plan to cut corporate tax rates would be particularly beneficial for banks, whose burdens are often elevated by a lack of deductions. The six largest U.S. banks could see net income rise $6.4 billion under the administration’s proposal. And lenders still produce big profits. JPMorgan generated $26.5 billion in the 12 months through June, a record for any U.S. bank.

    Mortgage, Autos

    Yet expectations for the third quarter are measured. JPMorgan, the nation’s largest bank, may say Oct. 12 that adjusted profit rose 2 percent to $5.89 billion, according to analysts surveyed by Bloomberg. At Citigroup Inc., set to report the same day, profit probably slipped 1 percent to $3.57 billion.

    Wells Fargo & Co. and Bank of America report the following day and Goldman Sachs Group Inc. and Morgan Stanley release earnings next week.

    There are other reasons for concern. While consumers are still borrowing more, there’s mounting evidence they’re becoming less reliable, potentially ending a period in which losses were low. Credit cards face heightened competition, while an overheated auto market has led some lenders like Wells Fargo to pull back.

    And for mortgage lending, a big driver for banks in the run-up to the 2008 financial crisis, new rules have made it more difficult to make money. Survivors have been buying loans from smaller “correspondent” lenders, a strategy that’s started to run out of room.

    “You will see some pain this quarter,” Whalen said. “JPMorgan and Wells Fargo have been bidding aggressively.”

    Trading Declines

    Trading also is expected to be down, in part because the lack of congressional action has left clients with few reasons to buy or sell. Executives from JPMorgan, Citigroup and Bank of America told investors last month to expect declines ranging from 15 percent to 20 percent in the third quarter from the same period a year ago.

    That may leave investors and analysts looking past this quarter’s results to the end of the year, when lawmakers may have more progress to show on tax policy and other priorities.

    “Banks tend to be more optimistic looking out than they are in the current quarter, so we’ll see,” Barclays’s Goldberg said. “Pipelines are good. At the end of the day though, loan growth is a reflection of the economy and economic growth has been a little bit more subdued than desired.”

      Read more: https://www.bloomberg.com/news/articles/2017-10-09/banks-pine-for-loan-growth-as-clients-wait-on-trump-s-promises