US Q3 GDP growth dragged down by inventories

The slowdown in GDP growth to 1.5% annualised in the third quarter, from a very strong 3.9% in the second, was mainly due to a big drag from inventories, which subtracted 1.4% points after making a neutral contribution in the second quarter. The growth rate of final sales to domestic purchasers, a better gauge of underlying demand that strips out inventories and net external demand, was still as high as 2.9% in the third quarter.

Consumption growth was a solid 3.2% annualized in the third quarter, while business investment expanded at a moderate 2.1% pace. The latter was something of a disappointment and is partly due to a much smaller 1.8% gain in intellectual property investment, down from 8.3% in the second quarter. This could get revised in the third estimate, which uses the quarterly services survey data to measure this component.

The gain in consumption was actually exceeded by a healthy 3.5% rise in real personal disposable income, which was partly helped by the sharp decline in gasoline prices towards the end of the quarter. Whether real incomes will continue to expand at such a rapid clip in the fourth quarter remains to be seen, however. Gasoline prices have stabilized, employment gains have slowed and hourly wages still haven't taken off.

Despite the strength of the dollar over the past 12 months, the 1.9% gain in exports actually slightly exceeded a 1.8% rise in imports, with net external demand broadly neutral for GDP growth.

Frankly, you can spin these GDP figures either way. Headline GDP growth slowed to below the economy's potential growth rate of about 2%, but the drag from inventories won't be repeated in the fourth quarter. The strength of consumption growth was encouraging, but the waning of business investment was a little troubling.

"We know from the monthly figures that a lot of that strength in consumption came at the start of the third quarter, with a notable softening in September. All things considered, we expect GDP growth of about 2.5% in the fourth quarter and in 2016 as well", says Capital Economics in a research note.