Hard habit to break

The US economy grew at a 3.5% annualised rate in the third quarter of 2018, according to an initial estimate released by the Commerce Department on Friday, slightly higher than market expectations. Consumer spending contributed 2.69 percentage points to the quarter’s growth rate, while net exports of goods and services subtracted 1.78 points.

In another report released on the previous day, the Commerce Department said the goods trade deficit increased by 0.8% to a record $76.04bn in September. The previous monthly record trade deficit was $76.03bn in July 2008.

Solid US GDP growth is burying the rising trade deficit, for now. The world’s largest economy expanded at healthy clip in the third quarter, albeit lower than the second quarter, and unemployment is at a 49-year low. Those figures obscure a drop in exports and a jump in imports, leading to a record monthly trade gap last month.

The Republican tax cuts passed last December have boosted the American economy. Consumer spending jumped at a 4% annualised rate in the third quarter, the fastest pace in about four years. The US economy is also near full employment at 3.7% and there are a record 7.1 million jobs available.

Strong consumer spending helped offset an increase in the trade deficit, which President Donald Trump has vowed to reduce as part of his trade war. US companies trying to get ahead of the latest tariffs on Chinese goods that went into effect on September 24 boosted imports by 9.1%. Meanwhile, retaliatory duties from China and other countries caused exports to drop by 3.5%.

That effect is likely to continue as importers race to get ahead of ratcheting trade levies. The 10% tariff rate on $200bn in Chinese goods is slated to jump to 25% next year. Trump has threatened to impose duties on another $267bn in Chinese products, and tariffs on autos and auto parts could be coming in February.

The Federal Reserve still expects decent economic growth of 2.5% next year, but it reflects a more normalised economy. Pressure on trade has also muted an anticipated increase in company spending. Business investment grew by only 0.8% in the third quarter, after jumping by 8.7% in the second quarter.

While the Trump administration renegotiated the North American Free Trade Agreement and is in trade talks with the European Union, America and its allies still have tariffs and retaliatory duties in place. Tensions with China are on track to escalate.

As effects of the Republican tax cuts fade next year, the trade deficit will be harder to ignore.

Alan McQuaid (30/10/18)

Economist