GDP Growth Raised for 3Q; Inventories May Weigh on 4Q

Before you go, we thought you'd like these...
Before you go close icon
FILE - In this June 6, 2015, file photo, a customer, bottom, pays for goods while shopping at the Atlanta Farmers Market in Atlanta. The Commerce Department issues the first of three estimates of how the U.S. economy performed in the July-September quarter on Thursday, Oct. 29, 2015. (AP Photo/David Goldman, File)
David Goldman/AP
By Lucia Mutikani

WASHINGTON -- The U.S. economy grew at a healthier clip in the third quarter than initially thought, but strong inventory accumulation by businesses could temper expectations of an acceleration in growth in the final three months of the year.

The Commerce Department said Tuesday that the nation's gross domestic product grew at a 2.1 percent annual pace, not the 1.5 percent rate it reported last month, as businesses reduced an inventory bloat less aggressively than previously believed.

The pace of economic growth, which was also boosted by upward revisions to business spending on equipment, suggests a resilience that could help give the Federal Reserve confidence to raise interest rates next month.

%VIRTUAL-pullquote- With growth like this, the Fed has the data it needs to light the candle finally and lift off on Dec. 16.%While consumer spending was revised down a bit, its pace remained brisk, suggesting consumers were cash-flush.

"The economy continues to move along at a good clip relative to its potential. With growth like this, the Fed has the data it needs to light the candle finally and lift off on Dec. 16," said Chris Rupkey, chief financial economist at MUFG Union Bank in New York.

When measured from the income side, the economy grew at a sturdy 3.1 percent clip, the fastest in a year and an acceleration from the second quarter's upwardly 2.2 percent pace. Wages and salaries increased $109.3 billion, $61.6 billion more than initially estimated.

The third-quarter's respectable expansion should set up the economy to achieve at least 2 percent growth in the second half of the year, around its long-run potential. In the wake of robust job growth in October and strong domestic demand, the Fed is expected to raise rates at its Dec. 15-16 policy meeting.

Other data released Tuesday showed consumer confidence fell further in November, hitting a 14-month low, as sentiment towards the labor market surprisingly soured. Economists suspected the Nov. 13 attacks in Paris and rising tensions in the Middle East had weighed on consumer confidence.

Despite the drop, more consumers say they plan to buy homes, automobiles and other big-ticket items over the next six months.

"The bigger picture suggests that domestic demand is still firm, spending plans are evolving positively and the housing market continues to post gains," said Robert Kavcic, a senior economist at BMO Capital Markets in Toronto.

A third report showed house prices rose solidly in August.

U.S. financial markets were little moved by the data as investors worried about global security after Turkey shot down a Russian warplane.

Large Inventory Accumulation

In the third quarter, businesses accumulated $90.2 billion worth of inventories, instead of the $56.8 billion reported last month. That followed more than $100 billion worth of inventories accumulated in each of the prior two quarters.

As a result, the change in inventories chopped off only 0.59 percentage point from third-quarter GDP growth, rather than the 1.44 percentage points the government reported in October.

That, however, suggests inventories could be a drag on fourth-quarter growth.

"The bigger inventory overhang helps explain why manufacturing sentiment remains cautious early in the fourth quarter, and does present downside risk to our 2.5 percent estimate for current-quarter GDP growth," said Michael Feroli, an economist at JPMorgan in New York.

Consumer spending, which accounts for more than two-thirds of U.S. economic activity, grew at a still strong 3 percent rate in the third quarter, down from the 3.2 percent rate estimated last month. The downward revisions mostly reflected weak outlays on communication services and utilities.

A measure of private domestic demand, which excludes trade, inventories and government spending, was revised down to a still sturdy 3.1 percent pace from the previously 3.2 percent rate.

Though there are signs consumer spending slowed early in the fourth quarter, it should continue to be supported by strong income gains. Income at the disposal of households after adjusting for inflation rose at a robust 3.9 percent pace in the third quarter.

A trade deficit that was larger than previously estimated subtracted 0.22 percentage point from GDP growth in the third quarter. Data released Tuesday showing a smaller goods trade deficit suggested trade would contribute to fourth-quarter growth.

Deep spending cuts by energy firms following a collapse in oil prices continued to weigh on growth. Spending on mining exploration, wells and shafts tumbled at a 47.1 percent rate, rather than the 46.9 percent pace reported last month.

However, business spending on equipment was revised up to a 9.5 percent rate from a 5.3 percent pace.

The Commerce Department also reported that corporate profits after tax fell at a 1.6 percent rate in the third quarter after rising at a 2.6 percent pace in the second quarter. Profits, which have been undercut by the dollar's strength and lower oil prices, were down 8.1 percent from a year ago, the biggest decline since the fourth quarter of 2008.

9 Numbers That'll Tell You How the Economy's Really Doing
See Gallery
GDP Growth Raised for 3Q; Inventories May Weigh on 4Q
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.
Read Full Story

Sign up for Finance Report by AOL and get everything from business news to personal finance tips delivered directly to your inbox daily!

Subscribe to our other newsletters

Emails may offer personalized content or ads. Learn more. You may unsubscribe any time.

People are Reading