The economy grew at a 1.5% annual rate in the third quarter, the Commerce Department reported this morning, close to consensus forecasts of 1.8%. Consumer spending grew at a solid 3.2% clip, buoyed by near-record sales of cars (which was expected) from Ford (F) - Get Ford Motor Company Report and General Motors (GM) - Get General Motors Company (GM) Report and nearly as big a contribution from furniture and other household goods at the likes of Home Depot (HD) - Get Home Depot, Inc. (HD) Report (which was not expected).
Investment dropped 5.6%, led by a 4% dip in commercial construction spending. Government spending rose at a 1.7% pace, enough to add three-tenths of a percentage point to growth. If government spending gains keep up in the fourth quarter, 2015 will become the first year since 2010 when government budget cutting hasn't been a drag on the overall economy.
"I would focus on equipment investment, which grew a solid 5% annualized over the quarter," Moody's Analytics chief economist Mark Zandi said. "Structures investment fell due to less energy development. Trade was better than I expected, but I think there is more pain to come. The effects [of a rising dollar] have yet to play out. Bottom line is that underlying growth remains between 2.5% and 3%. This is well above long-term trends and the economy is fast approaching full employment."
Initial market reaction suggested that traders think the numbers bolster the case for a December rate hike. The yield on 10-year Treasuries is up more than 4% this morning, to 2.12%.
But growth is sharply lower than the 3.9% annual rate of the second quarter. Turmoil in financial markets, especially in Asia, didn't have much effect on U.S. consumers. But businesses that had been building inventories in anticipation of more acceleration tapped the brakes. Inventory slowdowns cut the overall growth rate by 1.44 percentage points, the government said.
Unexpectedly, the events in China also have not yet shown up in export data, as exports rose slightly and the trade deficit trimmed 0.03 points from growth, far below the 0.7 percentage points that Barclays had predicted before the report.
The investment numbers are the biggest difference between the data and the picture of the economy the Federal Reserve painted yesterday, as a majority of the Fed's Open Market Committee appeared to lay some groundwork for raising interest rates in December. The Fed's post-meeting statement said "business fixed investment [has] been increasing at solid rates," but the dip in energy development spending kept the data from backing up that claim.
The release is the first of the government's three estimates of third-quarter growth that will be available before the Fed decides whether to raise the federal funds rate in December, which would be the first hike in nearly a decade. By then, September data on construction, inventories and trade will fill in the picture of whether the selloff in worldwide markets in August and September has caused business leaders and consumers to back off of more investment plans.
All of those will set the course of the data the Fed watches more closely than anything else: the pace of hiring and wage gains. The next big dose of news will be next Friday's October jobs report.
For now, not much changed -- even though the headline number makes it look like growth hit a wall and the Fed might have to wait.
Indeed, the central bank is finally getting some of what it wanted from the rest of Washington, as Congress works on a budget deal to relax spending caps imposed under the 2011 Budget Control Act. The $50 billion in extra spending expected to happen if the bill passes is enough to add almost three-tenths of 1% to 2016's growth rate.
Just as the government begins to stimulate the economy more, or at least impose less austerity, the Fed is tiptoeing toward the end of the zero-interest rate regime that has substituted for a bigger federal and state role in offsetting the long-lingering impact of the 2008 recession.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.