U.S. economic growth likely to have advanced in Q3, drag from inventories likely waned

The U.S. economic growth is expected to have continued with moderate pace in third quarter. In the previous quarter, the headline growth came in dull at 1.4 percent; however, the underlying details were better. Real final sales to domestic purchasers, which strip inventories and trade, rose 2.4 percent, consistent with the previous four-quarter average of 2.3 percent. Real consumption grew strongly by 4.3 percent, the biggest rise since the fourth quarter of 2014. A sharp reduction inventories that negatively contributed around 1.2 percentage points from the headline GDP print was the main drag on the economic growth.

The drag from the inventories appears to have waned in the September quarter and might have contributed modestly to the GDP print; however, it is slight uncertain, noted Societe Generale in a research note. Given the huge drawdown in stocks in the second quarter and t he small increase anticipated in the third quarter, it appears that inventory rebuilding might be a tailwind for growth later in 2016 and into early next year.

“We look for Q3 real growth to have advanced by 2.5 percent, which would actually be the strongest headline increase since Q2 2015”, added Societe Generale.

While the second quarter growth was driven mainly by the strength in consumption, the third quarter appears to have been more balanced. A good performance was maintained by consumer in the last quarter, as real PCE probably rose by around 2.6 percent. Gross private investment is expected to have risen slightly by around 1 percent in the third quarter as compared to a drop of almost 8 percent in the second quarter.

Investment went back into positive territory mostly due to an upturn in non-residential structures investment, which is likely to have risen by 8 percent after a drop of 2 percent in the June quarter. In structure, the significant drag from spending on gas and oil exploration structures might have waned. On the contrary, spending on capital equipment is expected to have stayed weak given the persistent weakness in durable goods orders, according to Societe Generale.