The U.S. economy grew at a healthy 3.5 percent annual rate in the last quarter, but Thursday’s report from the Commerce Department might do little to make voters feel more upbeat before next week’s elections, and the good growth is unlikely to be replicated in the final quarter of 2014.
The 3.5 percent annual rate of growth for the gross domestic product – the sum of goods and services in the U.S. economy – exceeded analyst expectations and followed a sizzling 4.6 percent rate of growth from April through June.
“Economic growth in the third quarter was strong, consistent with a broad range of other indicators showing improvement in the labor market, rising consumer sentiment, increasing domestic energy security and continued low health cost growth,” said Jason Furman, head of the White House Council of Economic Advisers.
Overall, the U.S. economy has grown at an annual rate of about 2.13 percent over the first three quarters of 2014 and 2.3 percent over the past four quarters.
Thursday’s report came after the Conference Board reported consumer confidence at its highest level since October 2007, before the financial crisis began in earnest. The unemployment rate keeps falling, standing at 5.9 percent in September, and first-time weekly claims for unemployment benefits are anchored below 300,000 – a sign of a strong economy. Gasoline prices have fallen more than 50 cents a gallon in much of the nation.
Will the spate of good economic news help President Barack Obama and congressional Democrats as voters go the polls in midterm elections? It hasn’t yet, said Lee Miringoff, director of the Marist Institute for Public Opinion.
“I think it has to do with the standard of living. People are having a difficult time making ends meet,” Miringoff said, noting that many people tell pollsters they don’t feel the improving economy. “It has not been a robust recovery ... a lot of people are still personally digging out financially, and they feel stretched to make ends meet.”
There’s also been a messaging problem.
“There hasn’t been a clear ‘We’ve turned the corner economically’ message coming out of the Democrats or the White House,” said Miringoff, noting that campaigns instead have focused on singular issues such as raising the minimum wage. “It you don’t toot your own horn, there’s not a lot of music.”
Also, a gloomier outlook for the global economy and details within Thursday’s report suggest slower growth in the months ahead.
“This report does have some negative implications,” said Doug Handler, chief U.S. economist for forecaster IHS Global Insight, pointing to expected slower defense spending and exports that will subtract from fourth-quarter growth. He suggested the next report could see growth of about 2.5 percent.
Much of Europe is skating near recession, and Latin America powerhouse Brazil is already there. China, another engine for global growth, is slowing sharply. Russia’s economy is in tatters, held down by international sanctions because of its conflict with neighboring Ukraine.
These all leave the United States better off relative to others, but in a global economy it also carries consequence. One is that the U.S. dollar strengthens against foreign currencies. That in turn makes U.S. products more expensive abroad and makes it more expensive for foreign companies to invest in or purchase from the United States.
Exports have been a spark for the U.S. economy, growing at a pace of 11.1 percent in the second quarter, slowing to a still-strong 7.8 percent growth rate in the third quarter, which ended on Sept. 30. Given the worsening global outlook, exports may slow further, Handler suggested.
And defense spending grew at an unusually high annual rate of 16 percent in the third quarter, compared with a second quarter rate of 0.9 percent. The strong third quarter number is unlikely to be repeated in the final three months of the year, he said.
Similarly, real personal consumption expenditures increased 1.8 percent in the quarter, down from 2.5 percent in the previous quarter.
An unknown is what effect plunging gasoline prices will have going forward, since they are akin to a huge tax cuts for lower- and middle-income consumers. It’s an important question since consumption, which drives about two-thirds of economic activity, has disappointed.
“We are seeing continued improvement in the underlying economy,” Michelle Meyer, a senior economist with Bank of America Merrill Lynch, said in a note to investors. “Growth is accelerating, but not yet booming. We remain comfortable with our view of further improvement with growth remaining above 3 percent through next year as the pieces of the puzzle slowly come together.”