Restocking, Trade Boost U.S. Third-Quarter Economic Growth

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WASHINGTON -- The U.S. economy grew faster than expected in the third quarter as businesses restocked shelves, but a slowdown in consumer and business spending pointed to an underlying weakness.

Gross domestic product expanded at a 2.8 percent annual rate, the quickest pace since the third quarter of 2012, the Commerce Department said Thursday. It was an acceleration from a 2.5 percent clip in the second quarter and beat economists' expectations for a 2.0 percent rate.

Details of the first estimate of third-quarter GDP were generally weak, with inventories contributing 0.83 percentage point to GDP growth. Excluding inventories, the economy grew at a 2.0 percent rate after expanding at a 2.1 percent pace.

Consumer and business spending growth slowed sharply, lending the report a weak tone and validating the Fed's decision to stick to its $85 billion monthly bond-buying program.

With near-term growth prospects not that bright, a reduction in the purchases, which aim to keep interest rates low, is not expected this year.

Consumer spending, which accounts for more than two-thirds of U.S. economic activity, expanded at a 1.5 percent rate, slowest pace since the second quarter of 2011. It grew at a 1.8 percent rate in the April-June period.

Some of the slowdown in consumption is blamed on weak demand for utilities because of unseasonably cool weather in the summer. But households have also been wary of loosening their purse strings as the pace of job gains slowed significantly during the quarter.

A separate report from the Labor Department suggested the jobs market continued to gradually improve.

Initial claims for state unemployment benefits fell 9,000 to a seasonally adjusted 336,000 last week. Economists polled by Reuters had expected first-time applications to fall to 335,000 last week.

An uncertain economic outlook is making businesses cautious about ramping up hiring. They are also holding back on spending on capital goods.

Business investment moderated, largely due to spending on equipment, which fell for the first time since the third quarter of 2012. %VIRTUAL-article-sponsoredlinks%Spending on nonresidential structures, including mining and drilling, rose for a second consecutive quarter.

The economy grew at a 1.8 percent rate in the first half of 2013, held back by a tightening in fiscal policy at the start of the year. Growth had been expected to gain speed in the fourth quarter as the drag from fiscal policy lifted.

But a 16-day government shutdown in October is expected to weigh on growth over the final three months of the year.

Away from inventories, the economy got some support from a slowdown in import growth, which helped to limit the rise in the trade deficit. Trade added 0.31 percentage point to growth in the third quarter.

The decline in government spending appeared close to running its course in the third quarter, with sturdy growth in spending by state and local authorities.

Government spending grew for the first time in a year, even though federal spending continued to decline. Economists say this fading fiscal drag would have set up the economy on a stronger growth path in the fourth quarter, were it not for the government shutdown.

The housing market appeared to weather a spike in mortgage rates, with spending on residential construction increasing strongly.

Other details of the GDP report showed some pick-up in inflation during the quarter, but not enough to alter the picture of benign price pressures.

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9 Numbers That'll Tell You How the Economy's Really Doing
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Restocking, Trade Boost U.S. Third-Quarter Economic Growth
The gross domestic product measures the level of economic activity within a country. To figure the number, the Bureau of Economic Analysis combines the total consumption of goods and services by private individuals and businesses; the total investment in capital for producing goods and services; the total amount spent and consumed by federal, state, and local government entities; and total net exports. It's important, because it serves as the primary gauge of whether the economy is growing or not. Most economists define a recession as two or more consecutive quarters of shrinking GDP.
The CPI measures current price levels for the goods and services that Americans buy. The Bureau of Labor Statistics collects price data on a basket of different items, ranging from necessities like food, clothing and housing to more discretionary expenses like eating out and entertainment. The resulting figure is then compared to those of previous months to determine the inflation rate, which is used in a variety of ways, including cost-of-living increases for Social Security and other government benefits.
The unemployment rate measures the percentage of workers within the total labor force who don't have a job, but who have looked for work in the past four weeks, and who are available to work. Those temporarily laid off from their jobs are also included as unemployed. Yet as critical as the figure is as a measure of how many people are out of work and therefore suffering financial hardship from a lack of a paycheck, one key item to note about the unemployment rate is that the number does not reflect workers who have stopped looking for work entirely. It's therefore important to look beyond the headline numbers to see whether the overall workforce is growing or shrinking.
The trade deficit measures the difference between the value of a nation's imported and exported goods. When exports exceed imports, a country runs a trade surplus. But in the U.S., imports have exceeded exports consistently for decades. The figure is important as a measure of U.S. competitiveness in the global market, as well as the nation's dependence on foreign countries.
Each month, the Bureau of Economic Analysis measures changes in the total amount of income that the U.S. population earns, as well as the total amount they spend on goods and services. But there's a reason we've combined them on one slide: In addition to being useful statistics separately for gauging Americans' earning power and spending activity, looking at those numbers in combination gives you a sense of how much people are saving for their future.
Consumers play a vital role in powering the overall economy, and so measures of how confident they are about the economy's prospects are important in predicting its future health. The Conference Board does a survey asking consumers to give their assessment of both current and future economic conditions, with questions about business and employment conditions as well as expected future family income.
The health of the housing market is closely tied to the overall direction of the broader economy. The S&P/Case-Shiller Home Price Index, named for economists Karl Case and Robert Shiller, provides a way to measure home prices, allowing comparisons not just across time but also among different markets in cities and regions of the nation. The number is important not just to home builders and home buyers, but to the millions of people with jobs related to housing and construction.
Most economic data provides a backward-looking view of what has already happened to the economy. But the Conference Board's Leading Economic Index attempts to gauge the future. To do so, the index looks at data on employment, manufacturing, home construction, consumer sentiment, and the stock and bond markets to put together a complete picture of expected economic conditions ahead.
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