Real GDP rose at a 3.5% annual rate in the advance estimate for 3Q18, about as expected. However, there were a few surprises in the details. Consumer spending growth was even stronger than anticipated. However, business fixed investment was unexpectedly weak. The quarterly swings in inventory growth and net exports were larger than anticipated, likely reflecting the impact of trade policy. For the financial markets, the strong growth figure provided little comfort. Investors are more concerned about the prospects for slower growth in the quarters ahead.
Consumer spending, which accounts for 68% of GDP, rose at a 4.0% annual rate (+3.0% y/y, matching the average pace of the last five years). Business fixed investment rose at a meager 0.8% pace, with weakness in structures (-7.9%), softness in equipment (+0.4%), and strength in intellectual property products (+7.9%). Residential fixed investment fell at a 4.0% pace (+0.4% y/y), following declines in the first two quarters of the year. Together, these three components make up Private Domestic Final Purchases (+3.1%). Government consumption and investment rose 3.3% (+2.4% y/y), adding 0.6 percentage point to overall GDP growth.
The trade deficit widened in 3Q18, but more than expected, subtracting 1.8 percentage points from GDP growth. A rising trade deficit is a sign of strength in the domestic economy (we consume more domestic goods and more imported goods).