Analysis Provided By: Lindsey M. Piegza, Ph.D, Stifel Analyst, Chief Economist
Near-Term Acceleration, Longer-Term Moderation
The U.S. economy grew at a faster pace than previously reported in the third-quarter, rising over 3%. Following a similarly sized increase April to June, the recent improvement in domestic activity coupled with the prospect of future tax reform has increased expectations for a continued accelerated pace of growth. But while near-term improvements may be enough to buoy the equity market, as well as offer justification for the Fed to raise rates again come December 13th, six months of above-trend GDP are hardly indicative of a new and improved economy after years of lackluster activity. Underlying support to third-quarter production appears to be overselling the economy’s strength, indicating isolated gains as opposed to broad-based strength. Furthermore, while the prospect of a reduced tax burden appears a welcome change in fiscal policy, some economists caution the added benefit to growth will be minimal at best. In other words, economic conditions may appear rosier than they actually are.
Since April, the U.S. economy has been growing at a noticeably accelerated 3% clip. While impressive relative to a more moderate 2.2% trend of the past eight years, the more recent uptick offers little evidence of sustained improvement; much of the recent growth stems from pent-up demand after repeated quarters of weakness and stockpiling of goods after grossly depleting inventories. In other words, the very reliance on isolated components to boost third-quarter growth calls into question the durability of the recent gains in topline activity, suggesting the “improvement” could prove short-lived.
Additionally, at this point, heightened expectations for continued gains in economic activity appear to be less rooted in the data and more the result of anticipated changes in Washington aimed to jumpstart domestic investment and boost consumer spending, a tall order for legislative policy, particularly in the near-term. While the administration hopes for 4%, 5% or 6% growth, economists suggest a continuation of moderate GDP through 2018 with only a small boost from tax reform.
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