Growth Growth Baby

Don’t let the catchy hook fool you—just like Vanilla Ice’s short-lived career, Friday’s GDP print may be a one-hit wonder. The U.S. economy grew at a 2.9% annualized pace in the third quarter, well exceeding economists’ expectations and climbing considerably from a 1.4% gain in the second quarter. While the headline number was strong, much of the growth can be attributed to a one-off surge in soybean exports that economists expect to reverse in the fourth quarter. As a whole, exports added 1.2% to GDP in the third quarter, but without the boost in demand for soybeans from China, they would only have added 0.3% to growth. In addition, household spending activity slowed more than expected and residential and equipment investment also contracted, with CAPX falling 2.7%. On a more positive note, non-residential investment rebounded by 5.4%, reflecting the uptick in drilling activity following a turnaround in oil prices earlier this year, and federal expenditure increased by 2.5%. Despite several disappointing sub-components, the acceleration in headline GDP will likely give the Federal Reserve confidence about its outlook for the U.S. economy and in its monetary policy decisions come this December. As of Friday, the market was pricing in a 70% chance of a rate hike at the December meeting, strongly signaling that tighter monetary policy is on the horizon. 

Source: Capital Economics, Bloomberg