Third quarter U.S. GDP leaves a bit to be desired

Following a very average second quarter GDP number of 2%, the new number for the third quarter, which was issued by the United States Department of Commerce yesterday, is really more of the same, albeit down one basis point to 1.9%.

While these numbers are not terrible, they are not what was expected a year ago at this time, when things were truly humming, or so it seemed, especially during the third quarter of 2018’s 4.6,% tally a number that many economists viewed as a “sugar high,” of sorts, due largely to the short-term boost, or byproduct, of the White House’s Tax and Jobs Act.

As the subsequent numbers since that very strong third quarter of 2018 have indicated, GDP has not kept that pace up. And it is fair to say that did not come as a surprise to many people, for various reasons.

One obvious reason is the ongoing United States-China trade war. With both economic superpowers ostensibly digging in for an even longer fight than expected, the impact of this interminable quarrel have left some marks on global supply chain processes, operations, and planning on myriad fronts.

A clear example has been the myriad “pull-forward efforts by U.S. shippers to bring in as much China-originated cargo as they can to hopefully mitigate the effect of tariffs, in the form of increased costs for consumers and businesses. After all, China is not paying to offset the gains in tariffs; U.S. consumers and businesses are, as far as most can tell.

We could talk about the impact of trade on GDP for a while, but it is clear there are other factors at play, too.

Analysis, in the form of a Tweet, from freight transportation consultancy FTR laid out its case for the third quarter 1.9% GDP reading: “Consumer spending added 1.9 percentage points to growth down from 3% in Q2. The drags from inventory investment and trade shrank from the second quarter but so did the government.”

The inventory observation from FTR was expanded upon in an analysis from IHS Markit, which observed that part of the current economic slowdown “reflects the continuation of an ‘inventory flow correction’ in the third quarter, whereby the pace of production was reduced by an economy-wide desire to slow the pace of inventory-building.”

The firm also pointed to temporary factors that impacted GDP, including the shutdown of GM’s assemblies beginning in mid-September and an ongoing cut in production of Boeing’s 737 line of aircraft.

While GDP has been down, or flattened out in recent quarters, IHS said things could be looking up in the coming quarters, with the inventory flow correction having run its course, solid consumer spending fundamentals, and housing activity, in the form of construction and sales, benefitting from past declines in mortgage rates. And it added it expects fourth quarter GDP to be up slightly to 2.0%, due to consumer spending growth, solid residential investment and growth of nonresidential fixed investment firms.

Not to be overlooked in the GDP tally is the current decline in manufacturing, which accounts for around 11% of U.S. economic output, according to the U.S. Bureau of Economic Analysis.

Data from the Institute for Supply Management (ISM) for August and September indicates the sector is now contracting after a 35-month stretch of growth. And National Association of Manufacturing Chief Economist Chad Moutray observed in a statement that the third quarter GDP reading continues to softening that has been seen over the past two quarters, even as growth was above consensus expectations, which makes if difficult to hire and expand business operations. 

“That is why we have been working with Congress and the administration to approve the USMCA, turn the trade war with China into a trade deal with China and pass a long-term reauthorization of the Ex-Im Bank,” said Moutray.

With the trade war looming over the domestic and global economic outlook, as well as the pairing of solid consumer spending activity and sluggish industrial activity, it stands to reason that assessing the current state of the economy can be viewed as an inexact science, in some ways. What’s more, the coming quarters figure to be interesting, what with all the moving economic parts in the air. As usual, supply chain management remains on the front lines through all of it and continue to serve as a real-time economic barometer of sorts. While the future remains uncertain on the economic front, it looks like it will be an interesting ride.