At first glance, the 1.5% q/q saar initial estimate of 3Q real GDP growth does not send a positive message about the health of the U.S. economy. However, this headline number is masking strength in key underlying areas, mostly notably the consumer. Final demand, growth excluding inventory changes, increased 3.0% led by a 2.2% gain in consumer spending. This follows a solid 2.4% increase in 2Q and reiterates the continued strength in the U.S. consumer. Business and residential investment added an incremental 0.3% and 0.2%, respectively, and government spending increased 0.3% primarily due to state and local governments. Even with the stronger dollar and slowdown in China, foreign trade resulted in a minimal 0.03% drag, much less than expected. A large inventory build-up in the first half of the year is the culprit behind the lower headline number, shaving 1.4% from an otherwise steady growth rate. It is worth noting that while this inventory stockpile could impact coming quarters, most of the damage is behind us given that it would require only an additional 0.6% drag on annualized GDP to get back to the average pace of inventory accumulation. Despite the inventory correction, fundamentals in the U.S. economy remain strong and the expansion continues, albeit at a moderate pace.
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