U.S.: Economic Activity Declines in Q3
U.S.: Economic Activity Declines in Q3 U.S. GDP declined by 0.3% Q/Q ann. in Q3. Personal consumption declined for the first time in 17 years, falling by a big 3.1% Q/Q ann. Net exports were surprisingly strong, while government spending also provided considerable support.
The U.S. economy shrank by 0.3% Q/Q ann. in Q3, following the 2.8% Q/Q gain in Q2. The decline in activity, however, was not as bad as the -0.5% Q/Q expected by the markets. During the quarter, personal consumption expenditure declined for the first time since 1991, falling by a massive 3.1% Q/Q, and subtracting a huge 2.25 ppt from the headline number. On the flip side, there was considerable support coming from net exports, which added 1.13 ppt, following the 2.93 ppt added in the previous quarter, while government spending (which rose by 5.8% Q/Q, its biggest gain in 5 years) added another 1.15 ppt. Much of the strength in government expenditure came from the 18.2% Q/Q surge in national defense spending.
Investment activity continued to be a significant source of drag on economic activity, with residential investment (down 19.1% Q/Q) and non-residential investment (down 1.0% Q/Q - which incorporates equipment and software (down 5.5% Q/Q) and non-residential structures (up 7.9% Q/Q) - both subtracting from growth. On the other hand, inventories added 0.56 ppt to growth. The trade sector was also very strong, as exports rose 5.9% Q/Q, while imports declined by 1.9% Q/Q.
On the whole, the report was slightly better than expected, but was nonetheless weak. In fact, it is now clear that U.S. economic activity has ground to a halt, and despite the aggressive monetary policy stimulus administered by the Fed and the various measures introduced by the U.S. federal government, the medium term outlook remains dire and should deteriorate further in Q4. Moreover, with an ongoing financial and housing sector crisis, declining consumer wealth and a weakening global economy, there is little to suggest that the current “perfect storm” engulfing the U.S. will abate anytime soon. As such, we expect the Federal Reserve to continue reducing the fed funds rate with a further 50bps of cuts in the policy rate in 25bps increments over the next two scheduled meetings.
TD Bank Financial Group
The information contained in this report has been prepared for the information of our customers by TD Bank Financial Group. The information has been drawn from sources believed to be reliable, but the accuracy or completeness of the information is not guaranteed, nor in providing it does TD Bank Financial Group assume any responsibility or liability.
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