The Bureau of Economic Analysis (BEA) released its estimate of real GDP growth for the third quarter. Economic output expanded at a seasonally adjusted annual rate of 3.5%, down from the 4.6% rate in the second quarter, but still respectable. The slowdown is no surprise given the rapid pace in the second quarter, driven in part by a bounce back from the decline in the first quarter. The real question is whether the momentum of the third quarter can be sustained. Key drivers of growth, personal consumption expenditures (PCE) and business fixed investment, slowed while more volatile sectors, net exports and national defense spending, made outsized contributions to growth.
PCE slowed to an annual pace of 1.8% from 2.5% in the second quarter and business fixed investment grew only 1.0% after a 19.1% surge last quarter. Strong exports and weak imports (which subtract from growth) combined with a whopping 16.0% increase in defense spending contributed 2 percentage points to the overall 3.5% growth rate. The trade imbalance is likely to correct and defense spending has declined consistently for the last three years. These sectors will not be the major engines of growth in the fourth quarter. A slowdown in inventory investment reduced growth by more than 0.5 percentage points and is as likely to restrain as contribute to growth in the fourth quarter. Continued strong growth in the fourth quarter will require a reacceleration in PCE and business fixed investment.
We expect PCE and business fixed investment will rebound in the fourth quarter and overall GDP growth around 3.0%. More balanced and sustained growth averaging 3.5% in 2015 and into 2016 is also expected. But given the fits and starts of the recovery to date, you have to call this one a definite maybe.