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Are the Brakes On?
Wednesday, November 4, 2015 6:40 AM

The U.S. economy grew at an annualized rate of 1.5 percent in the third quarter of the year. That was off from the second quarter’s torrid 3.9 percent growth rate. The number, while not spectacular, suggests the economy continues to grow at a steady pace despite the pressures from a strong dollar and weakness abroad.

But why?

Last winter’s cold weather and the labor slowdown at West Coast ports are still being felt in economic growth numbers. Those January and February disruptions held down growth in personal spending in the first quarter, leading firms to accumulate inventory on their shelves. In the third quarter, those firms sold off that inventory faster than they replenished it. The change in private inventories shaved 1.44 percent off the 1.5 percent growth rate in the July to September period. That’s a significant headwind but one that should prove temporary.

Private domestic investment tumbled at an annualized 5.6 percent rate in the third quarter, the first drop since the first quarter of 2014. The latest drop reflects a slowdown in construction of commercial and healthcare facilities. Business research and development and software investment also slowed. But firms invested more in information processing and transportation equipment.

The pace of government spending slowed to an annualized 1.7 percent in the third quarter, down from 2.6 percent in the second quarter. Much of that decrease comes from the federal level, where spending was almost flat, rising 0.2 percent.

Economists had speculated that the strong dollar and economic weakness overseas, particularly in China, would hold down net exports. The latest report, however, suggested that the U.S. economy has mostly shrugged off trade-related disruptions. Exports rose 1.9 percent in the third quarter, while imports climbed 1.8 percent. Net exports subtracted an almost insignificant 0.03 percent from economic growth.

Consumer spending rose 3.2 percent in the third quarter, a slight pullback from the previous quarter, when it grew 3.6 percent. But the growth in durable goods spending, long-lasting items such as washing machines and automobiles, continued strong, rising 6.7 percent in the quarter.

The tailwind provided from the housing sector eased somewhat in the third quarter. Residential investment added just 0.2 percentage points to overall growth in the July through September period. That’s the smallest contribution from home building and improvements in a year.

Source:  Cornerstone Research: Commerce Department and The Wall Street Journal, 29 October 2015