US economy grows at fastest pace in two years

United States GDP grew at a 2.9 percent annual rate in the third quarter of 2016, better than many were expecting. But experts warn not to celebrate just yet. 

Brennan Linsley/AP/File
Shoppers walk through Cherry Creek Mall, in Denver.

News Friday of economic progress in the US is relatively good, with some hints of ‘meh.’ According to a report released today by the US Department of Commerce, gross domestic product (GDP), the value of goods and services produced in the country, increased at a 2.9 percent annual rate in the third quarter. This is an uptick from a sluggish 1.4 percent increase in the second quarter, and above the 2.5 percent growth rate that many economists had forecasted for the July through September quarter.

It was the strongest quarterly growth rate since the third quarter of 2014.

GDP includes consumer spending, business investment, exports of goods and services, and government spending and investment. The metric is used by the government to measure national economic health.

"This shows that the U.S. is roughly on track. It's a natural bounce back following a pretty underwhelming year so far," Luke Bartholomew, fixed income investment manager at Aberdeen Asset Management in London, told Reuters. "The election campaign has probably created a degree of uncertainty that has impacted growth."

Most of the growth this quarter can be attributed to businesses investing to build up their inventories of goods, and to a 10-percent surge in shipments overseas, especially of soybeans. This makes for the fastest acceleration in export growth since the fourth quarter of 2013, as Reuters points out. Though according to some economists, inventory and export bumps are likely short-term gains.

“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,” says Barclays Investment Bank economist Rob Martin in an email statement.

Government spending, which grew 0.5 percent last quarter, also contributed to GDP growth. Most of the spending was at the federal level, as the Commerce Department data show, where a 2.5 percent uptick balanced out a 0.7 percent spending decline among the states.

Another strength was a 5.4 percent increase in business investment in office buildings, factories, and other nonresidential structures. Business spending also fell, however. The data show that corporate spending on equipment dropped an annualized 2.7 percent. As Bloomberg points out, this is on top of a 2.9 percent decline in the second quarter.

“The economy has gained some altitude from the dismal pace during the first half, but it is too early to celebrate,” says Sung Won Sohn, an economist at California State University Channel Islands, according to The Wall Street Journal.

Economic measures such as consumer spending, which account for about 70 percent of the economy, as Bloomberg reports, grew somewhat, by 2.1 percent. This is good news, but less so when considering that last quarter consumer spending grew by double that rate. At 4.3 percent, it was the biggest jump since late 2014. “It is a bit worrisome that consumer spending, which was the backbone of the economic growth last quarter, slowed markedly,” Dr. Sohn added.

The economy has not grown more than 3 percent in any year since 2005, as the Journal reports. It is expected to grow at a 2 percent annual pace through 2026 by some projections.

While the Federal Reserve looks mostly at employment data and inflation growth when considering a rate hike, some economists think that any signs of economic growth would support an interest rate hike in December.

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