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US Q3 growth still strong at 3.5% despite slower spending

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The US economy remained on a solid footing in the third quarter, matching previously reported results, as stronger business investment and a bigger boost from inventories cushioned the worst trade drag since 1984.

[NEW YORK] The US economy remained on a solid footing in the third quarter, matching previously reported results, as stronger business investment and a bigger boost from inventories cushioned the worst trade drag since 1984.

Gross domestic product grew at an unrevised 3.5 per cent annualized rate, Commerce Department data showed Wednesday, in line with the median forecast in a Bloomberg survey. Household spending, which accounts for about 70 per cent of the economy, grew 3.6 per cent, revised from 4 per cent, on weaker durable goods purchases.

The biggest change from the prior report on GDP, the value of all goods and services produced in the nation, came from stronger business investment, while most other categories were in line with earlier readings.

Nonresidential fixed investment – which includes spending on equipment, structures and intellectual property - grew 2.5 per cent, revised from a 0.8 per cent gain. Economists are monitoring such spending because, along with consumer purchases, it was a main driver of growth in the first half.

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Combined with a 4.2 per cent pace of GDP growth in the April to June period, the results capped the best back-to-back quarters since 2014. At the same time, growth is projected to moderate this quarter.

Risks to the outlook include an escalating trade war with China, cooling global demand and rising borrowing costs, while the boost from President Donald Trump’s tax cuts is expected to wane next year.

The report also provided a first glimpse of some key data: Corporate pretax earnings rose 10.3 per cent from a year earlier, the most in six years, after a 7.3 per cent advance. Gross domestic income rose 4 per cent, the most since 2014.

 Equipment spending was revised up to a 3.5 per cent rise from a 0.4 per cent gain, while investment in structures showed a 1.7 per cent drop compared with a previously reported decline of 7.9 per cent.

Net exports subtracted 1.91 percentage point from growth, while inventories added provided a 2.27 point boost.

Stripping out the volatile components of trade and inventories, so-called final sales to domestic purchasers climbed at an unrevised 3.1 per cent pace.

Housing still posted a third consecutive drag on GDP growth and reaffirmed that the industry has entered a broad slowdown. Residential investment fell 2.6 per cent, compared with an initially reported contraction of 4 per cent.

Inflation rose an unrevised 1.7 per cent. The Federal Reserve’s goal is 2 per cent based on its preferred gauge tracking personal consumption expenditures. Excluding food and energy, the Fed’s preferred price index advanced 1.5 per cent, revised from 1.6 per cent.

Government spending increased at a 2.6 per cent rate, revised from 3.3 per cent. That added 0.44 point to growth.

GDP report is the second of three estimates for the quarter; the third is due in December as more data become available.

BLOOMBERG