Headline US GDP growth has printed at a better than expected 1.9% seasonally adjusted annualised rate.
This is significantly better than the 1.6% median forecast submitted to Bloomberg, and broadly consistent with the US economy’s trend post-crisis growth rate of around 2%.
The core dynamic of the advance Q3 GDP report – and therefore the US economy – is one of very strong consumer spending, masking a substantial deterioration in business investment.
Personal consumption expenditures rose 2.9%, after an even stronger Q2, and consistent with generally positive consumer surveys. US Consumers clearly are not worried about slowing global growth, or the ongoing trade war.
Investment data shows that businesses, on the other hand, have significantly cut back on investment spending, with non-residential fixed investment falling 3%. Consumption makes up the bulk of the US economy so the strong consumer picture means that falling investment was easily outweighed by strong consumption spending.
As the UK economy has proved since the EU referendum, as long as consumers remain willing to spend, business investment can dry up altogether and the economy can keep ticking over at a slightly slower growth rate.
With business surveys in the US pointing to cooling demand for labour, households may not remain as exuberant for long. The much hyped “phase one” trade deal that has reportedly been struck by the US and China could bring some relief to US businesses in Q4.
Even though a partial deal may relieve tariffs and be great for US equities, significant uncertainty will remain regarding US trade policy so a sudden recovery in business investment should not be taken for granted.
Net trade, in the meantime, is likely to remain a drag on growth as a whole. This all adds up to a murky outlook for Q4 – hence the lack of any USD rally on the ostensibly solid GDP headline print.
The FOMC is up tonight at 18:00 GMT, and is widely expected to cut rates by 25 basis points. Today’s figures certainly validate the Fed’s “precautionary” rate cuts.
They certainly don’t support a clear cut case for a deep easing cycle of the sort that fixed income markets continue to price in.
If the Fed intends to take a pause before cutting rates any further after tonight, it will have to signal this to fixed income markets in some way – possibly sparking some of the USD upside that has been missing after today’s GDP beat.