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US GDP Rose 3 Percent in Q3, but Disposable Income and Savings Slowed

U.S. real gross domestic product increased at a better-than-expected annual rate of 3 percent in the third quarter, according to the advance estimate released by the Bureau of Economic Analysis. But other indicators might not bode well for merchants.

The increase in real GDP in the third quarter reflected positive contributions from personal consumption expenditures, private inventory investment, nonresidential fixed investment, exports and federal government spending, the BEA said. These increases were partly offset by negative contributions from residential fixed investment and state and local government spending.

Disposable personal income increased 2.1% to $73.6 billion in the third quarter, a slowdown compared with an increase of $125.1 billion, or 3.6%, in the second. Personal saving was $494.8 billion in the third quarter, also below the $545.6 billion in the second. The personal saving rate (personal saving as a percentage of disposable personal income) also dropped to 3.4% in the third quarter compared with 3.8% in the second.

“The strong third quarter GDP reading reflected solid growth in domestic final sales, led by strong growth in business equipment investment,” Ken Matheny, executive director of U.S. economics at Macroeconomic Advisers by IHS Markit, said. “GDP growth slowed by only one-tenth from the second to the third quarter, despite hurricane-related disruptions. This suggests that growth excluding hurricane effects was particularly strong in the third quarter.”

In comparison, China’s gross domestic product growth remained robust in the third quarter, increasing 6.8% year-on-year, easing marginally from the 6.9% growth recorded in first and second quarters this year, compared to a year earlier. On a quarterly basis, GDP growth was up 1.7% in the third quarter compared to the second, which had increased 1.8% from the first three months of the year.

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This level of growth is considered the “new normal” for China, which for many years had posted GDP gains in the 9 percent to 10 percent range. In 2016, China’s GDP grew 6.7% for the first three quarters of the year compared to the previous year.

Matheny said, the unexpected strength of the U.S. GDP report was in part due to more inventory-building than estimated, implying less of an increase in inventory-building in the fourth quarter. As a result, IHS lowered its forecast for fourth quarter GDP by one-tenth to 2.8%.

This was shown in the recent retail sales report from the Commerce Department, in which the inventory to sales ratios in the department and specialty store sectors ticked up slightly in August, the most recent month for which the measure was available.

[Read more about the retail sales forecast: As Economy Wobbles, NRF Revises 2017 Retail Sales Downward]

How this impacts the important fourth quarter retail sales period is unclear. September’s surge in retail sales was driven primarily by a jump in performance at auto dealerships and gas stations. The month-over-month increase in total retail sales was 1.6%, to $483.9 billion.

Sales at department, chain and discount stores fell by 1.3% to $12.6 billion, flat on a 12-month smoothed basis.

Sales at clothing and accessories specialty stores increased by 1.1% compared to the year-ago period, to $21.7 billion, and increased 1.6% on a 12-month smoothed basis.

At the combined department, chain, discount and specialty sectors, where most of the traditional retail apparel business is done, sales inched up negligibly to $34.3 billion.

With key economic indicators showing some weakness, the National Retail Federation last month has adjusted its forecast for retail sales for 2017, with sales now expected to increase between 3.2% and 3.8% rather than the 3.7% to 4.2% forecast earlier this year.

The BEA reported that the price index for gross domestic purchases increased 1.8% in the third quarter compared with an increase of 0.9% in the second quarter. The PCE price index increased 1.5% percent, compared with an increase of 0.3% in the prior period. Excluding food and energy prices, the PCE price index increased 1.3%, compared with a second quarter increase of 0.9%.

Current-dollar personal income increased $113.7 billion in the third quarter, compared with an increase of $119.1 billion in the second. BEA said the deceleration in personal income primarily reflected decelerations in personal dividend income, in rental income, and in wages and salaries that were offset by an acceleration in government social benefits, a smaller decrease in personal interest income, an acceleration in non-farm proprietors’ income, and a smaller decrease in farm proprietors’ income.