U.S. Growth Cools in Third Quarter
Economy plods along as inventory drawdown drags down GDP
By ERIC MORATH
Updated Oct. 29, 2015 3:22 p.m. ET
The U.S. economy stayed afloat in the third quarter despite global turmoil, but it’s struggling to break out of the slow-growth pace that has plagued the economic expansion.
The economy grew at a modest 1.5% seasonally adjusted annual rate from July through September, the Commerce Department said Thursday. That marked a deceleration from the second quarter, when U.S. gross domestic product—the broadest measure of economic output—expanded at a 3.9% pace.
Solid consumer outlays and increased spending on business equipment and home building propelled the economy against overseas headwinds weighing on U.S. manufacturers. But from a year earlier, the growth advanced at a familiar 2% rate—showing the economy remains locked into a restrained expansion more than six years after the recession ended.
“The domestic economy isn’t on fire, but demand is looking relatively solid,” said James McCann, an economist with Standard Life Investments. “International developments take the sheen off it, but we think the momentum is genuine.”
Inventory levels, an often volatile component of GDP, exerted substantial pressure on the latest figures. Businesses clearing shelves subtracted 1.44 percentage points from the overall advance. A measure of purchases by U.S. residents, excluding changes in inventory levels, rose at a much healthier 2.9% pace last quarter.
The latest inventory swing could be a one-time correction, and some economists expect a snapback in the final three months of the year. But others say it shows businesses are concerned about demand, as evidenced by lackluster retail sales. Consumer outlays increased by 3.2% in the third quarter, but purchases of cars and other long-lasting goods drove that gain.
Disappointing sales caused PPG Industries Inc., maker of Glidden and Pittsburgh paint, to slow production so stores could thin their stockpiles.
“We had a wet June and people were anticipating a stronger paint season,” PPG Chief Executive Michael McGarry told investors this month. “We saw the major retail folks both in the U.S. and Canada start to destock late in the third quarter.” Mr. McGarry said he expects the effect to be short-lived, based on early October sales.
Unspectacular overall growth last quarter remains a worrying sign that the economic expansion could be losing steam.
The slowdown came at the same time employers eased hiring after adding an average of more than 200,000 jobs a month for a year and a half. Measures of industrial output show the manufacturing sector bordering on a contraction, reflecting the influence of a stronger dollar and China’s slowdown. And retail sales, outside of automotive purchases, declined in September and are up less than 1% from a year earlier.
Lower gasoline prices supported inflation-adjusted incomes last quarter, filtering through to solid overall household spending, said Paul Ashworth, an economist at Capital Economics. “Whether real incomes will continue to expand at such a rapid clip in the fourth quarter remains to be seen,” he said. “Gasoline prices have stabilized, employment gains have slowed and hourly wages still haven’t taken off.”
Lower gasoline prices, a revamped menu and refreshed stores are driving increased sales at Smoothie King locations, said Chief Operating Officer Tom O’Keefe. But he remains wary about the expansion’s durability.
“It’s sluggish,” he said. “I’m bullish about my business, but the economy isn’t really helping or hurting.”
The latest reading on economic growth, and a subsequent revision next month, will weigh on the minds of Federal Reserve officials when they meet next in December. The Fed held benchmark interest rates steady on Wednesday. The central bank said the economy “has been expanding at a moderate pace,” while explicitly noting a rate increase will be considered at the next policy-making meeting.
Thursday’s report showed a smaller increase in business investment than during the prior quarter, but the mix was different than some economists anticipated. Investment in equipment, a category that had been tied to a slowing oil industry, accelerated. But spending on construction fell and intellectual property outlays posted only a small gain.
Trade proved to be a neutral factor for the overall economy, easing concerns about exports falling amid weak global demand. Instead, trade subtracted 0.03 percentage point from the growth rate. Exports, which add to output, increased at a 1.9% rate during the quarter. Imports, which subtract from output, increased 1.8%.
Trade data tends to be volatile and is often revised in subsequent releases.
Government spending advanced more slowly in the third quarter than the prior three months. State and local governments helped offset a pullback in defense outlays. The public sector is poised to add to economic growth this year for the first time since 2010.
Home building and improvements contributed less to economic growth last quarter than in the spring, but the housing sector remains a bright spot for the economy in 2015. Residential investment was up 8.9% in the third quarter from a year earlier, the best annual gain in two years.
Fulton Homes, a Tempe, Ariz. builder, has pulled 50% more permits through three quarters of the year compared to a year earlier. Vice President Dennis Webb said gyrations in the global economy don’t seem to be worrying home buyers.
“They don’t really follow what’s going on in China and Greece—they follow what’s going on in Gilbert,” he said, referring to the Phoenix suburb. “The economy here is good, employers are moving in…There’s a lot of pent-up demand for housing.”