The US 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 yesterday said the nation’s gross domestic product grew at a 2.1 per cent annual pace, not the 1.5 per cent rate it reported last month. It said efforts by businesses to reduce an inventory bloat had not been as aggressive as previously believed.
Still, 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. While consumer spending was revised down a bit, its pace remained brisk.
“This is a sturdy second GDP print for the third quarter when looking past the inventory swings,” said Robert Kavcic, a senioreconomist at BMO Capital Markets in Toronto.
“Importantly, domestic demand in the US economy remains very solid, something that will surely give comfort to the Fed as it ponders its next move.”
When measured from the income side, the economy grew at a sturdy 3.1 per cent clip, the fastest in a year and an acceleration from the second quarter’s 2.2 per cent pace.
The third-quarter’s respectable expansion should set up the economy to achieve at least two per cent 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 December 15-16 policy meeting.
Domestic demand in the US remains very solid, something that will surely give comfort to the Fed
The GDP revision was in line with economists’ expectations.
US stock index futures slightly pared losses after the data while prices of Treasuries maintained gains. The dollar was trading lower against a basket of currencies.
Businesses accumulated $90.2 billion worth of inventories in the third quarter, instead of the $56.8 billion reported last month. Businesses amassed more than $100 billion worth of inventories in each of the prior two quarters.
As a result, the change in inventories chopped off 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. Consumer spending, which accounts for more than two-thirds of US economic activity, grew at a three per cent rate, down from the 3.2 per cent 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 per cent pace from the previously 3.2 per cent rate.
Though there are signs consumer spending slowed early in the fourth quarter, it is likely to remain supported by a tightening labour market, rising house prices, which are raising household wealth, as well as low inflation.