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2 reasons Friday's great GDP report kind of stinks

Myles Udland
Markets Reporter

The US economy grew at an annualized rate of 2.9% in the third quarter of 2016, the fastest rate since the third quarter of 2014.

But underneath this better-than-expected headline — Wall Street economists were looking for growth of 2.6% — we see a number boosted by two of the least-reliable elements of this report: inventories and trade.

In the third quarter, inventory accumulation added 0.61% to GDP while trade added 0.83% to growth. Neil Dutta, an economist at Renaissance Macro, notes these are the “most volatile” components of the report, adding that taking out these elements yields annualized GDP growth of just 1.4%.

The third quarter’s inventory accumulation largely offsets what had been a drag from this component of GDP over the last 5 quarters. The boost from trade was largely the result of a (likely) one-off jump in soybean exports.

This does mark the third-straight quarter of positive contributions from the trade component, reflecting a slowing impact of the US dollar on trade, though the 0.01% and 0.18% bumps seen in the first and the second quarters of the year, respectively, were far less meaningful than Friday’s jump.

A middling increase in personal consumption during the third quarter adds credence to the idea that Friday’s GDP number wasn’t a marked change in direction for the economy, but a reinforcement of the idea that the US is basically a 2% economy right now.

Personal consumption rose at a rate of 2.1% in the third quarter, roughly in-line with the broader growth trend we’ve seen since the financial crisis but well below the 4.3% expansion we saw during the second quarter.

Personal consumption accounts for about 70% of GDP.

Ian Shepherdson, an economist at Pantheon Macro, said Friday that the consumption figures in Friday’s report were below the 2.7% consumption boost implied by recent data.

Analysts at Barclays, who had called for a 3% increase in third-quarter GDP, said Friday, that, “Overall, we do not see much that is new in this report to change our interpretation of events in the third quarter.”

The firm added: “Household spending remains solid despite the slowdown, suggesting that households remain confident about income and employment prospects. We welcome the seeming turning point in the inventory cycle, but in general, we prefer to discount the contribution from inventories and do not expect that this rebound will become a true source of growth. The increase in exports will support manufacturing growth, but the softness in capital and consumer goods imports remain a source of concern.”

Overall, then, Friday’s report shows more of the same from the US economy: solid, but not runaway, economic growth that provides the optimists and pessimists enough fodder to build their case.

Myles Udland is a writer at Yahoo Finance.

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