Market Insider

Economy growing better than economists had expected just a few weeks ago

Key Points
  • The economy may escape sub-2% growth in the final two quarters of the year, thanks to a third quarter GDP revision from the government and a string of better fourth quarter economic reports.
  • Revised third quarter growth was reported at 2.1% from 1.9%.
  • Better-than-expected business investment is signaling that the business spending and manufacturing slowdown may be close to bottoming and that it should help growth in the final quarter of the year.
Flextronics International Apple factory employees work on Apple Mac Pro computer assembly in Austin, TX, November 20, 2019.
Tom Brenner | Reuters

Economists are boosting their fourth quarter growth forecasts after the trade deficit narrowed and business investment showed a surprise pickup in October.

The CNBC/Moody's Analytic's rapid update of economists forecasts showed a median increase of 0.1 percentage points to 1.8%. The government also reported a bigger-than-expected revision to growth in the nation's third quarter gross domestic product to 2.1% from a first reading of 1.9%.

Economists are watching to see if October's business investment rebound is signaling that the slowdown in spending and manufacturing could be coming to an end.

VIDEO4:4704:47
There's weakness in fundamentals the Fed may be overlooking: Economist

J.P. Morgan economists Wednesday raised their tracking forecast for fourth quarter GDP to 2.1% from 1.25%, based on data releases this week. The Atlanta Fed's GDP Now forecaster now sees tracking fourth quarter GDP at 1.7%, from an anemic 0.4% just eight days ago.

"The largest contribution to the revision came from yesterday's October international trade report, which showed a surprisingly large narrowing of the trade deficit," the J.P. Morgan economists wrote. "But there was also good news in today's October durable goods report, which indicated some improvement in business capital spending, a category that has been weak for much of the year."

The trade gap narrowed to $66.5 billion, down 5.7%, as both imports and exports declined in October. Durable goods beat expectations, with core capital goods orders up 1.2% in October, while some economists expected a decline. Core capital goods shipments rose by 0.8%.

"Although much of October's improvement was in volatile components, incoming estimates of core capital goods orders place business investment on a more solid footing in Q4 than we had thought," noted Barclays economists.

However, consumer spending which has been the main pillar of the economy seems to be moderating after October real consumption increased by just 0.1%, the smallest gain since February.

"Consumption growth has moderated in the last three months from an extremely strong pace in March through July. Still, solid nominal consumption together with momentum from growth in wages and salaries suggests spending can remain the main driver of growth through 2020," wrote Citigroup economists.

VIDEO3:1403:14
Fed: Higher retail costs attributable to tariffs

Chris Rupkey, chief financial economist at MUFG Union Ban, agrees the consumer remains in the driver's seat for the economy.

"We can be thankful that the economy is still in a good place with economic growth a little better, a rebound in business durable equipment expenditures, and a sharp decline in joblessness which together tell the story that recession is nowhere to be seen and should not be on anyone's radar in 2020," wrote Rupkey.

He said the jump in business spending should mean an improved trend in the fourth quarter.

"Net, net, the economy's forward momentum has been dented this year by the escalation of the trade war which has created a cloud of uncertainty for companies, disrupting their global supply chains of parts needed for domestic production that were decades in the making," he added.