U.S. economy surges, auguring potential interest-rate hike

Last Updated Oct 28, 2016 9:53 AM EDT

The U.S. economy is hitting the gas just ahead of the November presidential election. 

The Commerce Department said Friday that the country’s gross domestic product -- the broadest measure of economic growth -- rose at a 2.9 percent annual rate in the third quarter, beating analyst forecasts of 2.6 percent.

The spurt amounts to a welcome rebound from anemic growth in the first half of the year. Over the last 12 months, the economy has expanded at a rate of only 1.3 percent, while since 2014 growth has averaged 2.1 percent. Following previous recessions, the economy has typically grown at least 3 percent annually.

The good news was tempered by expectations that continued growth may lead to a hike in the Federal Reserve’s benchmark interest rate at its December meeting. “Against a backdrop of modest growth and continued progress ... we maintain our call that the Fed will tighten at the December Federal Open Markets Committee meeting,” said Gregory Daco, head of U.S. Macroeconomics for Oxford Economics, in a note.

That sentiment was seconded by Steve Hovland, director of research at HomeUnion. ‘”The expectations of a December rate hike by the Fed soared after the U.S. economy grew at a 2.9 percent annualized rate in the third quarter,” he said. “As a result, the 10-year Treasury rate climbed to the highest level in five months, putting upward pressure on mortgage rates. The era of record-low mortgage rates will begin to come to a close in the coming months.”

The latest GDP figure, the government’s initial estimate for third-quarter growth, is likely to change when the Commerce Department revises it on November 29 and in future weeks. But with the presidential election only 11 days away, the good numbers are likely to give impetus to Democratic candidate Hillary Clinton. 

The big contribution to GDP was growing exports, which were up 10 percent, said Joseph LaVorgna, chief U.S. economist for Deutsche Bank. “We’re also building inventory, and we did a bit better on the consumer side too,” he added. 

There was also a smaller decrease in state and local government spending, and an upturn in federal government spending, the Commerce Department said.  

Some of that surge in exports was due to a one-off spike in soybean exports, which will be reversed in the fourth quarter, according to Capital Economics. Overall, net exports added 0.8 percentage points to GDP growth. After being a sizable drag on growth for the preceding five quarters, inventories added a further 0.6 percentage points.

Growth in inventories also helped move the dial higher. Inventories added 0.6 points after having subtracted 1.2 points in the second quarter, according to Jim O’Sullivan, chief U.S. economist with High Frequency Economics.

Despite the good GDP number, most forecasters expect the economy to slow in the final three months of the year. “The economy doesn’t have a whole lot of breath apart from exports,” LaVorgna said. 

Consumption growth slowed to 2.1 percent, residential investment contracted by 6.2 percent and equipment investment fell by 2.7 percent. “The growth rate of final sales to domestic purchasers slowed to a disappointing 1.4 percent in the third quarter, from 2.4 percent in the second,” said the Capital Economics report.

Josh Bivens of the Economic Policy Institute said that stripping out the volatile inventory components of GDP suggests the economy is growing at a more modest pace than the third-quarter data indicates.

Still, economists believe the rebound raises the odds that the Federal Reserve will hike interest rates later this year. 

“Overall, with the survey evidence improving markedly over the past month or two, the news of a decent acceleration in GDP growth to well above its potential will leave Fed officials a lot more confident about the outlook,” said Paul Ashworth, chief U.S. economist with Capital Economics, in a note. “A rate hike is on the way.”

  • Ed Leefeldt

    Ed Leefeldt is an award-winning investigative and business journalist who has worked for Reuters, Bloomberg and Dow Jones, and contributed to the Wall Street Journal and the New York Times. He is also the author of The Woman Who Rode the Wind, a novel about early flight.