Canadian Manufacturing

U.S. economy on the comeback trail in Q3

Economists note that key decisions made by the Federal Reserve during the recession appear to be paying off

WASHINGTON—The U.S. economy powered its way to a solid annual growth rate of 3.5 per cent from July through September, outpacing most of the developed world and appearing on track to extend its momentum through this year and beyond.

The result isn’t a fluke.

It turns out the world’s biggest economy did a lot of things right after the Great Recession that set it apart from other major nations. In the view of many economists, those key decisions, particularly by the Federal Reserve, appear to be paying off now.

An improving economy led the Fed to end its stimulative bond buying program. Launched during the 2008 financial crisis, it was an unprecedented and aggressive effort to revive a dormant economy by buying trillions in bonds to reduce long-term interest rates.

Doug Handler, chief U.S. economist at IHS Global Insight, credited the Fed and its bond purchases with helping pull the country out of the worst downturn since the 1930s.

“Its greatest impact was instilling confidence in consumers and the business community that Fed officials were determined to do everything they could to stimulate growth,” Handler said. “To know you have the Fed pulling for you instills confidence.”

The latest government report on the gross domestic product added to evidence that the Fed’s efforts have translated into robust job growth and a recovery that appears to be solidifying.

The third-quarter expansion was propelled by solid gains in business investment, exports and the biggest jump in military spending in five years. It followed a 4.6 per cent annualized expansion in the second quarter, which marked a dramatic turnaround from the first three months of the year, when a harsh winter depressed activity.

Many economists say they’re confident that the current October-December quarter will be another solid one. They also project that full-year growth for 2015 will hit 3 per cent, giving the economy the best annual performance since 2005, two years before the Great Recession began.

“The economy does appear to be accelerating of late,” said Dan Greenhaus, an analyst with investment firm BTIG.

Greenhaus added that the GDP report showed an economy “on a sounder footing today than at any time over the last few years.”

The U.S. landscape stands in contrast to other big economies of the world.

Japan’s GDP contracted at an annualized rate of 7.1 per cent in the April-June quarter.

Germany, Europe’s traditional growth engine, risks falling into recession _ or growth so weak it holds back the entire euro currency union’s weak recovery.

The French economy posted zero growth in the first two quarters of the year and has revised down its growth forecasts for the year to a paltry 0.4 per cent.

Momentum is decelerating even in China, which has posted blistering figures in recent years. Growth in the world’s No. 2 economy waned to a five-year low of 7.3 per cent in the third quarter, though the result falls roughly in line with Chinese leaders’ plans for a controlled slowdown.

The U.S. economy is benefiting from a variety of other factors beyond the Fed. For one thing, it’s relatively insulated from weakness overseas. Exports account for less than 14 per cent of U.S. activity, one of the lowest such shares in the world.

It’s American consumers who drive the U.S. economy. They account for nearly 70 per cent of the economy, and things are looking up for them. The job market is healthier than it’s been in a while, with the unemployment rate at a six-year low of 5.9 per cent. And falling gas prices frees up money for consumers to spend on other things that help fuel growth.

The nation has significantly strengthened its financial system, too.

Sung Won Sohn, an economics professor at the Martin Smith School of Business at California State University, said that compared with other major economies, the U.S. moved more quickly to bolster its banking system. And consumers’ finances are in better shape because many Americans have pared debt.

“The problem in Europe is that they let the problems fester and get worse because they did not act as quickly as we did,” Sohn said.

To be sure, the U.S. isn’t insulated from headwinds that could snag progress. Volatility has unsettled financial markets recently, and continuing global weakness is likely to drag exports in the coming months.

“Going forward, the appreciation in the U.S. dollar and slow growth in Europe and Asia are likely to once again make trade a net-drag on American economic growth,” said James Marple, senior economist at TD Bank Group.

For the third quarter, consumer spending grew at a decent 1.8 per cent annual rate, which economists described as steady but unspectacular. The figure was slower than the 2.5 per cent increase in the spring quarter.

Also driving growth was an 11 per cent rise in export sales, far outpacing imports, which fell at a 1.7 rate. The smaller trade gap added 1.3 percentage points to growth in the third quarter.

Stronger government spending added another 0.8 percentage point to growth, with federal spending growing at a 10 per cent rate. It was the first positive contribution in more than two years. Federal activity had been constrained by spending cuts and last year’s partial government shutdown.

Defence spending shot up at a 16 per cent rate, the fastest advance since a 17.4 per cent gain in the second quarter of 2009.

Business spending on equipment grew at a 7.2 per cent rate in the third quarter, and residential construction grew at a 1.8 per cent rate.

The Federal Reserve noted the brightening U.S. prospects in its statement Wednesday. It retained language in a statement saying it didn’t expect to raise its benchmark interest rate for a “considerable time.” But it also pointed to rising signs of strength, including job gains and lower unemployment.

Paul Ashworth, chief U.S. economist at Capital Economics, said that the latest GDP report showed “the Fed was right to take a slightly more hawkish tone.”

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