The Bureau of Economic Analysis said that strong consumer spending helped push real GDP growth higher, with real GDP growth revised up to 3.2 percent in the third quarter. It was originally estimated to be 2.9 percent growth, and both figures were the fastest quarterly growth rate in two years. Overall, this report was good news. With the U.S. economy expanding by only 1.1 percent at the annual rate in the first half of 2016, the third quarter numbers were entirely welcome, especially for consumer spending and net exports. Business investment remains a concern, but hopefully recovers moving forward with improvement confidence. In the end, real GDP will grow by 1.6 percent in 2016, but I expect stronger activity next year, with the current forecast being 2.5 percent growth.
Personal consumption expenditures added 1.89 percentage points to headline growth in this latest report, up from 1.47 percent in the prior release. Consumer spending on goods increased 3.4 percent at the annual rate in the third quarter, boosted by strength in durable goods purchases, including motor vehicles. Service sector consumption also improved with this revision, with Americans spending increasing their spending on services modestly in the third quarter, up 2.5 percent. Yet, nondurable goods spending continued to be a slight drag on growth.
Net exports were another bright spot in the third quarter, contributing 0.87 percent to real GDP, up slightly from 0.83 percent in the advance estimate. It remained the largest contribution for net exports since the fourth quarter of 2013. In the third quarter, goods exports jumped an annualized 14.2 percent, with goods imports edging up 0.7 percent. This was notable, especially given the challenges that many manufacturers have had in growing export sales in light of dollar and global headwinds. On a year-over-year basis, goods exports have risen 2.6 percent.
Meanwhile, business spending remained weaker than desired, mirroring recent cautiousness seen in other economic indicators. Nonresidential fixed investment increased marginally, up just 0.1 percent at the annual rate in the third quarter. Spending on structures rebounded strongly (up 10.1 percent), but investments in equipment (down 4.8 percent) contracted for the fourth straight quarter. At the same time, residential investment declined for the second consecutive quarter, down 4.4 percent. In total, fixed investment was off 0.9 percent in the third quarter, subtracting 0.15 percentage points from headline GDP growth. On the positive side, business inventory spending picked up, adding 0.49 percentage points. That followed five straight quarters where inventory spending was a drag on real GDP activity.