The Economy

US Economy Surges 3% Despite Hurricanes

The third-quarter GDP gain may bolster the case for an interest rate hike in December and complicate the debate over tax cuts.
Matthew HellerOctober 30, 2017

The U.S. economy posted another solid quarter in the July-September period, defying expectations that the recent hurricanes might knock it off track.

The nation’s gross domestic product expanded at an annual rate of 3% in the third quarter following a 3.1% gain in the previous quarter. It was the first time since 2014 that GDP growth has come in above 3% for two straight quarters and easily beat economists’ forecast of a 2.5% increase.

The third-quarter growth was fueled by an increase in inventory investment and a smaller trade deficit, offsetting a hurricane-related slowdown in consumer spending and a decline in construction. Consumer spending, the main engine of the economy, rose at a 2.4% rate after a 3.3% gain in the second quarter.

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“Economists initially expected that Hurricanes Harvey and Irma would deal a blow to the country’s steady growth — a prospect reinforced by a net job loss in September — but became more optimistic in recent weeks,” The New York Times reported.

The latest GDP report is expected to further encourage the Federal Reserve to raise interest rates next month and may complicate the debate over the Trump administration’s proposed tax cuts.

“Fed officials will be encouraged by both the overall performance and the composition of growth in the third quarter, which confirms the U.S. economic expansion remains on solid ground,” Michelle Girard, chief U.S. economist at NatWest Markets, told Reuters.

The administration is seeking big tax cuts and fewer regulations to boost annual GDP growth to 3%. Economists say it is highly unlikely that growth for this year will reach that level, with the first quarter being tepid and projections for the current quarter hovering around 2.8%.

“The underlying trend in GDP growth is clearly telling us two things,” Jared Bernstein, a former economic adviser to President Barack Obama, told the Times. “Keep on rockin’ steady with [Chairwoman Janet] Yellen at the Fed, and there’s no need for a big, wasteful tax cut.”

Excluding inventory investment, the economy grew at a 2.3% rate in the third quarter, slowing from the second quarter’s 2.9% pace.