U.S. Third-Quarter Economic Growth Revised Upward to 3.6%

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Charles Rex Arbogast/AP
By Lucia Mutikani

WASHINGTON -- The U.S. economy grew faster than initially estimated in the third quarter as businesses aggressively accumulated stock, but underlying domestic demand remained sluggish and buoyed the case for the Federal Reserve to keep up its stimulus for now.

Gross domestic product grew at a 3.6 percent annual rate instead of the 2.8 percent pace reported earlier, the Commerce Department said Thursday. Economists polled by Reuters had expected output would be revised up to only a 3.0 percent rate.

The third-quarter growth pace was the fastest since the first quarter of 2012 and marked an acceleration from the April-June period's 2.5 percent rate, although economists expect slower growth in the final months of the year.

Businesses accumulated $116.5 billion worth of inventories, the largest increase since the first quarter of 1998. That compared to prior estimates of only $86 billion.

"To the extent that the massive accumulation in inventory may have been involuntary, we are likely to see an unwind in inventory this quarter which will provide some downside risks to fourth-quarter GDP performance," said Millan Mulraine, senior economist at TD Securities (TD) in New York.

Inventories accounted for a massive 1.68 percentage points of the advance made in the July-September quarter, the largest contribution since the fourth quarter of 2011. %VIRTUAL-article-sponsoredlinks%The contribution from inventories had previously been estimated at 0.8 percentage point. Stripping out inventories, the economy grew at a 1.9 percent rate.

But a gauge of domestic demand rose at just a 1.8 percent rate -- probably insufficient to convince the U.S. central bank to trim its bond purchases in December. The Fed has been buying $85 billion in bonds each month to keep borrowing costs low but officials have said they may start to slow these in coming months.

Atlanta Federal Reserve President Dennis Lockhart, who doesn't have a vote on the policymaking committee this year or next, said one strong quarter didn't make a trend. "I am not prepared to interpret the revised third quarter number as an indication that the economy is on a much stronger track -- I think we're still on that relatively moderate growth track," Lockhart said.

The strong inventory accumulation in the face of a slowdown in domestic demand means businesses will need to draw down on stocks, which will weigh on GDP growth this quarter.

Fourth quarter growth estimates are already on the low side, with a 16-day shutdown of the government in October expected to shave off as much as half a percentage point from GDP. Fourth-quarter growth estimates are currently below a 2 percent rate.

U.S. stocks opened lower and prices for Treasuries were down in morning trade.

Consumers Cautious

Consumer spending, which accounts for more than two-thirds of U.S. economic activity, was revised down to a 1.4 percent rate, the lowest since the fourth quarter of 2009. Spending had previously been estimated to have increased at a 1.5 percent pace, and grew at a 1.8 percent rate in the April-June period.

But there is reason to be cautiously optimistic about future consumption, despite a generally weak opening to the holiday shopping season last month.

A separate report from the Labor Department showed initial claims for state unemployment benefits dropped 23,000 to a seasonally adjusted 298,000 last week.

That was the third straight week of declines and confounded economists' expectations for an increase to 325,000. The four-week moving average for new claims, which irons out week-to-week volatility, fell 10,750 to 322,250.

Coming on the heels of a report Wednesday showing a pickup in private sector hiring, the claims report suggested the labor market is gaining momentum.

The government is expected to report on Friday that nonfarm payrolls increased 180,000 last month and the unemployment rate fell to 7.2 percent from 7.3 percent, according to a Reuters survey of economists.

The GDP report showed upward revisions to business spending, but estimates for residential construction were lowered. The trade deficit was larger than previously estimated, resulting in trade being neutral to growth in the third quarter.

The Commerce Department also reported that corporate profits after tax increased at a 2.6 percent pace in the third quarter, slowing from the prior quarter's 3.5 percent pace.

A second report from the Commerce Department showed orders for manufactured goods dropped 0.9 percent in October after rising 1.8 percent in September.

But orders for non-defense capital goods, excluding aircraft -- seen as a measure of business confidence and spending plans -- slipped 0.6 percent in October instead of the 1.2 percent fall reported last week.

U.S. Third-Quarter Economic Growth Revised Upward to 3.6%
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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