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Tags: atlanta | fed | gdo | growth

Atlanta Fed Lifts Q4 GDP Estimate to 2.3%

Atlanta Fed Lifts Q4 GDP Estimate to 2.3%
(Andrii Yalanskyi/Dreamstime)

Thursday, 26 December 2019 08:00 AM EST

The Atlanta Fed has boosted its GDP now forecast for fourth-quarter growth to 2.3% from 2.1%.

The longest expansion in history, now in its 11th year, remains on track thanks to the Federal Reserve cutting interest rates three times this year. The U.S. central bank last week kept rates steady and signaled borrowing costs could remain unchanged at least through 2020.

Though growth has been relatively strong, economists did not expect the economy to achieve the Trump administration's 3.0% target this year.

Gross domestic product increased at a 2.1% annualized rate, the Commerce Department said in its third estimate of third-quarter GDP.  The economy grew at a 2.0% pace in the April-June period.

Growth estimates for the fourth quarter range from as low as a 1.5% rate to as high as a 2.3% pace. Growth has slowed from the 3.1% rate notched in the first three months of the year in part because of the 17-month trade war between the United States and China and the fading stimulus from last year's $1.5 trillion tax cut package.

The Atlanta Fed GDP Now revision came after new orders for key U.S.-made capital goods barely rose in November and shipments fell, suggesting business investment will probably remain a drag on economic growth in the fourth quarter.

The White House's 17-month-old trade war with China has hurt business confidence, undermining capital expenditure. Despite a recent easing of tensions, regional manufacturing surveys showed business confidence remaining subdued in December.

Even if business confidence were to improve in early 2020, a surge in capital expenditure is unlikely. Boeing announced last week it would suspend production of its best-selling 737 MAX jetliner in January as fallout from two fatal crashes of the now-grounded aircraft drags into 2020. Boeing on Monday ousted Chief Executive Dennis Muilenburg.

"We expect industrial momentum will remain muted in 2020 amid an environment of sluggish global growth, persistent trade policy uncertainty and subdued corporate profitability," said Oren Klachkin, lead U.S. economist at Oxford Economics in New York. "Boeing's decision to halt production of the 737 MAX will present a continuing drag on orders."

The Commerce Department said orders for non-defense capital goods excluding aircraft, a closely watched proxy for business spending plans, edged up 0.1% last month as a surge in demand for electrical equipment, appliances and components was partially offset by a drop in machinery orders.

These so-called core capital goods orders rose by an unrevised 1.1% in October. Economists polled by Reuters had forecast core capital goods orders gaining 0.2% in November.

Core capital goods orders rose 0.7% on a year-on-year basis in November.

Shipments of core capital goods dropped 0.3% last month. Core capital goods shipments are used to calculate equipment spending in the government's gross domestic product measurement. Core capital goods shipments rose by a downwardly revised 0.7% in October. They were previously reported to have jumped 0.8%.

Economists said the weak core capital goods shipments posed a downside risk to fourth-quarter GDP growth estimates, which range from as low as a 1.5% annualized rate to as high as a 2.3% pace. The economy grew 2.1% in the third quarter.

While manufacturing is struggling, the housing market is steadily rising, driven by the Federal Reserve's three interest rate cuts this year. In a second report on Monday, the Commerce Department said new home sales rebounded 1.3% to a seasonally adjusted annual rate of 719,000 units last month, lifted by gains in activity in the Northeast and West regions.

October's sales pace was, however, revised down to 710,000 units from the previously reported 733,000 units. New home sales are volatile on a month-to-month basis because they are drawn from a small sample of houses selected from building permits. Sales jumped 16.9% from a year ago.

"We expect housing activity to remain supported with now-lower mortgage rates and a Fed on hold, but do not expect a further substantial pick-up in activity into 2020," said Veronica Clark, an economist at Citigroup in New York.

Business investment has contracted for two straight quarters, with weak spending on equipment and nonresidential structures such as gas and oil well drilling contributing to the decline that has pushed manufacturing into recession.

Boeing's biggest assembly-line halt in more than 20 years is expected to disrupt supply chains, further depressing manufacturing, which accounts for 11% of the economy. Economists estimated the suspension of the 737 MAX aircraft production could cut first-quarter 2020 gross domestic product growth by at least half a percentage point.

Last month, overall orders for durable goods, items ranging from toasters to aircraft that are meant to last three years or more, tumbled 2.0% after gaining 0.2% in the prior month.

Durable goods orders were held down by a 72.7% plunge in demand for defense aircraft orders and parts last month. Economists expect a rebound after the U.S. Congress passed a huge defense spending bill last week.

"The big, bipartisan defense bill that passed Congress last week ensures defense spending will be robust next year, however," said Chris Low, chief economist at FHN Financial in New York. "It’s not a recipe for gangbusters growth, but capital spending should no longer detract from growth next year."

Orders for transportation equipment dropped 5.9% after edging up 0.1% in October. Motor vehicles and parts orders increased 1.9% in November as the end of a strike at General Motors boosted auto production. Orders for non-defense aircraft and parts fell 1.8% last month.

Overall shipments of durable goods nudged up 0.1% in November, reversing October's 0.1% drop. Durable goods inventories increased 0.4% last month. They have risen in 16 of the last 17 months. Unfilled durable goods orders fell 0.4% in November after being unchanged in October.

© 2022 Thomson/Reuters. All rights reserved.

The Atlanta Fed's GDPNow tracker is now predicting 2.3% growth in Q4. That's up from 2.1% seen a few days back
atlanta, fed, gdo, growth
Thursday, 26 December 2019 08:00 AM
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