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President Donald Trump
- The US economy grew by 3.5% in the third quarter, according to Friday's GDP report.
- Ther GDP report also showed major distortions because of President Donald Trump's tariffs on Chinese goods and metals.
- Trade took a major bite out of growth, dragging down GDP by 1.78 points, the worst number in 33 years.
- Companies also built up inventories in a rush to import goods before they were subject to tariffs.
There's mounting anecdotal evidence that President Donald Trump's trade war is causing trouble for the US economy and businesses. But Friday's third quarter GDP report may be the best hard evidence yet that the tariffs are causing major disruptions in the economy.
Headline third quarter GDP came in at 3.5%. But the contribution of net exports of goods and services to GDP - the measure of how much trade added or subtracted to GDP growth - was a dismal minus-1.78 percentage points:
- The drag on GDP was the largest negative contribution to GDP growth for trade in 33 years - trade subtracted 1.91 points from GDP in the second quarter of 1985.
- In other words, if trade was a net neutral, neither adding nor subtracting from GDP, third quarter GDP would have been a dynamite 5.3%.
- If trade matched its average contribution since 2015, a 0.33 point drag, GDP would have come in at 5%.
Uncertainty over trade policy may have also contributed to muted growth in capital expenditures by businesses. Nonresidential fixed investment - spending on large-ticket items like equipment - added only 0.12 points to GDP, the lowest in seven quarters, while overall fixed investment was a 0.04-point drag, the worst in 10 quarters.
Companies have said trade policy uncertainty and the possibility of tariffs will push up costs elsewhere will curb capex spending.
But the tariffs may have also helped prevent the GDP report from coming in softer than expected. Similar to the second quarter's sudden surge in exports (mostly soybeans), inventories surged in the third quarter and added 2.2 percentage points to GDP.
Michael Feroli, an economist at JPMorgan, surmised that many businesses imported goods before they were hit by tariffs which helped boost the inventories number.
"This may have reflected front-loading of imports (which increased at a 9.1% rate) ahead of scheduled tariff increases - imports which then end up temporarily in stockpiles," Feroli said.
That could mean companies rushed to import goods from China that were about to get hit by tariffs, stockpiling those items before they got more expensive.
But the sudden inventory build is unlikely to last. Ian Shepherdson, chief economist an Pantheon Macroeconomics, said the huge drag from trade may lessen slightly going forward, but the counterbalancing inventory build is even more likely to reverse.
"Trade likely will be a drag in Q4, though much less than Q3," Shepherdson tweeted Friday. "But there's zero chance inventories will repeat their Q3 add, so jointly they'll be a drag on growth."
The GDP report follows a series of surveys and anecdotal evidence from companies that suggest the tariffs are causing trouble.
The Federal Reserve's Beige Book, a collection of interviews with business executives from each of the Fed's 12 districts, was chock full of concern about possibly costs from the tariffs. And many major corporations - from Tesla to 3M - have warned that the tariffs will added tens of millions of dollars to their costs going forward.