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3/19/2020

Acting Assistant Secretary Diana Furchtgott-Roth Economy Statement for the Treasury Borrowing Advisory Committee of the Securities I…

Acting Assistant Secretary Diana Furchtgott-Roth Economy
Statement for the Treasury Borrowing Advisory Committee of
the Securities Industry and Financial Markets Association
October 29, 2018

The U.S. economy grew 3.5 percent in the third quarter, according to last week’s advance
estimate. This pace confirmed the economy’s strong growth in the wake of the Administration’s
tax reforms, deregulatory measures, and other business-friendly policies. Real GDP is forecast
to grow 3.2 percent in 2018, which would be the first calendar year of growth above 3 percent
since 2005.
Further accelerations in private consumption and a strong build in private inventory were the
main drivers of solid economic performance in the third quarter, followed by a larger positive
contribution from government spending. Private non-residential fixed investment made a small
positive contribution in the third quarter, although residential investment continued to decline,
and net exports also subtracted from growth. Altogether, private domestic final purchases (the
sum of consumption, business fixed investment, and residential investment) advanced by 3.1
percent in the third quarter, following 4.3 percent growth in the second quarter.
In the second quarter, for the first time in history, the number of job openings climbed above
the number of job seekers, and this configuration, considered indicative of a tight labor market,
has continued in the third quarter. In fact, the average monthly pace of job creation continues
to exceed that of 2017. The unemployment rate fell to a 49-year low of 3.7 percent in
September, and growth of nominal wages and personal income continues to trend higher, with
progress also apparent in real wage gains. Measures of consumer and business sentiment
remain at, or very near, multi-year highs. Private forecasters are predicting solid growth in the
fourth quarter as well as for the year as a whole.

GDP GROWTH
According to the advance estimate of real GDP, which was released last Friday, the U.S. economy
grew at an annual rate of 3.5 percent in the third quarter, a strong pace if slower than the second
quarter’s 4.1 percent surge. Private domestic final purchases – the sum of personal
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3/19/2020

Acting Assistant Secretary Diana Furchtgott-Roth Economy Statement for the Treasury Borrowing Advisory Committee of the Securities I…

consumption, business fixed investment, and residential investment – grew in the third quarter
at an annual rate of 3.1 percent, following a 4.3 percent rise in the second quarter. This measure
of private demand has held above 3 percent in all but two of the last seven quarters. Over the
past four quarters, private domestic final purchases have grown by 3.4 percent at an annual
rate, well above the 2.7 percent average seen over the previous two years.
Growth in real personal consumption expenditures accelerated further in the third quarter,
growing at an annual rate of 4.0 percent, the fastest quarterly pace in four years, a er an
already-strong 3.8 percent advance in the second quarter. Outlays on consumer durables drove
consumption, rising 6.9 percent at an annual rate, extending the momentum of the second
quarter’s 8.6 percent advance. Spending on nondurables was up 5.2 percent in the third
quarter, accelerating from the 4.0 percent reading in the previous quarter. Consumption of
services also accelerated in the third quarter, to a 3.2 percent annual rate, a er growing 3.0
percent in the second quarter. On balance, real personal consumption expenditures added 2.7
percentage points to growth in the third quarter – the largest contribution from this component
in nearly four years.
Business fixed investment increased 0.8 percent at an annual rate in the third quarter, a er
increasing 8.7 percent in the second quarter, and added 0.1 percentage point to overall growth.
Since the start of 2017, real private nonresidential fixed investment has grown at a quarterly
average of 6.6 percent, marking a return to the healthy pace seen in the early years of the
recovery. Fixed investment in intellectual property products continued to grow at a healthy, if
slower, pace, rising 7.9 percent in the third quarter a er a 10.5 percent increase in the second
quarter. Investment in this category has grown at an average annual rate of nearly 11 percent
per quarter over the past three quarters, the fastest three-quarter clip in such investment seen
in 12 years. Although investment in structures declined 7.9 percent in the third quarter a er
growing at double-digit paces in each of the previous two quarters, the level of investment in
structures remains almost 8 percent above its level at the start of 2017. Outlays for equipment
grew just 0.4 percent in the third quarter, so ening a er growing an average annual rate of
nearly 9 percent in each of the previous six quarters. As expected, the cycle of inventory
accumulation turned strongly positive in the third quarter, adding 2.1 percentage points to real
GDP growth.
Residential investment retrenched for the third consecutive quarter, declining 4.0 percent at an
annual rate and subtracting 0.2 percentage point from growth, a er making an essentially flat
contribution in the previous quarter. Signs of slowing in the housing sector persist, against a
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3/19/2020

Acting Assistant Secretary Diana Furchtgott-Roth Economy Statement for the Treasury Borrowing Advisory Committee of the Securities I…

backdrop of low inventories and rising mortgage rates. Existing home sales, which account for
90 percent of all home sales, have declined in each of the past six months, including a 3.4
percent drop in September, and these sales were 4.1 percent lower over the past year through
September. New home sales have fallen in five of the past six months, and as of September,
were 13.2 percent lower than a year ago. Total housing starts declined 5.3 percent in
September, reflecting a 0.9 percent decrease in the single-family sector but also a 15.2 percent
decrease in the volatile multi-family component. Although building permits fell below total
starts in August, which may suggest the possibility of weaker housing activity in coming months,
permits did rise back above starts in September. Homebuilder confidence remains elevated,
and in October, stood only six points below the 18-year high reached in December 2017, with
current as well as forward-looking components of the survey strengthening. House price
appreciation remains relatively strong, exceeding core inflation and income measures, although
the pace has slowed relative to a year ago, likely due to notably higher mortgage rates in recent
months.
Total government spending rose 3.3 percent at an annual rate in the third quarter, accelerating
from a 2.5 percent pace in the previous quarter. A er making an essentially neutral contribution
to growth in most of 2016 and 2017, government spending has added to growth in each of the
past four quarters, including a 0.6 percentage point contribution in the third quarter. Federal
outlays grew 3.3 percent in the third quarter, a er a 3.6 percent rise in the previous quarter,
while state and local government spending growth stepped up to a 3.2 percent rate in the third
quarter – the fastest pace in more than two years.
The U.S. trade deficit widened in the third quarter, as import growth accelerated to an annual
rate of 9.1 percent, and export growth slowed to a decline of 3.5 percent annual rate. One
reason for the widening of the deficit is that the U.S. economy is growing faster than the
economies of the rest of the world, so U.S. domestic demand for imports is stronger. As a result,
net exports subtracted 1.8 percentage points from growth in the third quarter, a er adding 1.2
percentage points to growth in the second quarter.

LABOR MARKETS AND WAGES
Through the end of the third quarter of 2018, monthly job growth averaged 208,000, well above
the 182,000 monthly average for 2017. The unemployment rate fell to a 49-year low of 3.7
percent in September. Meanwhile the most comprehensive measure of labor market slack,
which includes those marginally attached to the labor force and those working part-time for
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3/19/2020

Acting Assistant Secretary Diana Furchtgott-Roth Economy Statement for the Treasury Borrowing Advisory Committee of the Securities I…

economic reasons, continued to trend lower in the third quarter, despite an uptick in
September: the U-6 unemployment rate edged up to 7.5 percent, but was still 1.6 percentage
points below the pre-recession average of 9.1 percent. The employment report for October will
be released this Friday.
Although the pace of nominal wage growth remains above year-ago levels, it has leveled o in
the past several months. Even so, gains have been su icient to bring about a more solid
increase in real wages. Nominal average hourly earnings for private-sector production and
nonsupervisory employees rose 2.7 percent over the year ending in September, a bit higher
than the 2.6 percent, 12-month pace through September 2017. But real average hourly earnings
advanced 0.4 percent, the fastest rate in over a year, picking up from 0.2 percent pace over the
12 months through September 2017, and also much higher than the negative or flat readings in
the vast majority of months since then. Growth of wages and salaries for private industry
workers has also consolidated at a higher rate; this measure of compensation grew 2.9 percent
over the twelve months through June 2018, accelerating from the 2.6 percent pace over the
previous twelve months. Using the Personal Consumption Expenditures (PCE) price index, the
index of most interest to the Federal Reserve, real average hourly earnings grew at 0.7 percent
over the past year. Data for the Employment Cost Index for the third quarter will be released this
Wednesday.

PRICES
Price inflation has slowed in recent months, although it continues to accelerate on a year over
year basis, based on several measures. Over the 12 months through September 2018, the
consumer price index (CPI) for all items rose 2.3 percent, slowing from the 2.9 percent, 12month readings seen this past June and July, but still faster than the 2.2 percent pace over the
year through September 2017. Energy price inflation recently slowed markedly from the
double-digit paces registered over the summer, and food price inflation, though higher over the
past two years, has stabilized. Excluding food and energy, the CPI increased 2.2 percent over the
year through September 2018, above the pace of 1.7 percent through September 2017.
The PCE price index has also accelerated at both the headline and the core levels. The index
rose 2.0 percent over the 12 months through September, above the 1.8 percent observed a year
earlier. Similarly, core PCE price inflation picked up to 2.0 percent over the year through
September 2018, well above the 1.5 percent pace observed a year earlier.

CONCLUSION
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3/19/2020

Acting Assistant Secretary Diana Furchtgott-Roth Economy Statement for the Treasury Borrowing Advisory Committee of the Securities I…

Against a backdrop of tax reform, deregulation, and other incentives to boost investment,
incomes, and labor force participation, headline real GDP growth remained strong in the third
quarter, rising by 3.5 percent, propelled by a further acceleration in private consumption and
solid gains in government spending and private inventories. Although some components of
private investment declined in the latest quarter, third quarter trends attest to the underlying
strength of private domestic demand in the economy and the likelihood of future growth
benefits from this investment. With various measures of consumer and business confidence at
or near record highs and the labor market very close to full employment, the underpinnings of
sustainably rapid growth for the foreseeable future remain in place.

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