Economic growth slows sharply in the third quarter

October 29, 2015, 1:57 PM UTC
Federal Reserve Chair Janet Yellen.
Photograph by Jewel Samad—AFP/Getty Images

The U.S. economy expanded at 1.5% on an annualized basis in the third quarter, a sharp drop off from second quarter growth of 3.9% and below economists’ expectations of 1.6%.

The Bureau of Economic Analysis report also showed that inflation remained tame in the third quarter, with Personal Consumption Expenditures rising just 1.2% year over year, after rising 2.2% in the second quarter. Core inflation, which excludes volatile food and energy prices, rose 1.3%, sharply lower from last quarter’s 1.9% rise.

The drop off in growth was attributed to a decline in exports, likely as a result of the increasingly strong dollar. An expensive dollar is probably helping to keep a lid on inflation too, which is on track to come in below the Federal Reserve’s target of 2% for the fourth year in a row.

Though the estimates will be revised in coming months, today’s report is evidence that economic growth and inflation in the United States is not accelerating. The Federal Reserve, which has kept interest rates at near zero for seven years, and has expanded its balance sheet by trillions of dollars in an effort to encourage more spending and investment, seems powerless to jolt the economy into the sort of growth that would make up for the steep losses we suffered during the financial crisis.

Wednesday’s statement from the Federal Reserve kept the door open for an interest rate hike in December. And while this report doesn’t give a lot of ammunition for those angling for higher borrowing costs, there’s an obvious desire on the part of some FOMC members to start the rate increase process as the unemployment rate begins to fall.

But with the strong dollar dragging down exports and keeping inflation low, and with slow growth and massive central-bank stimulus abroad likely to keep the dollar strong, Janet Yellen and company may have to wait a long time for a falling headline employment rate to move inflation back to where the Fed wants it to be.

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