Economy in U.S. expands at a 2.8% rate as inventories climb

The economy in the U.S. expanded in the third quarter at a faster pace than forecast, led by the biggest increase in inventories in more than a year as household purchases and business investment slowed.

Gross domestic product rose at a 2.8% annualized rate after a 2.5% gain the prior three months, a Commerce Department report showed today in Washington. The median forecast of economists surveyed by Bloomberg called for a 2% advance. Consumer spending climbed 1.5%, the smallest increase since 2011.

The biggest gain in inventories since the first three months of 2012 risks holding back production in the current quarter, which began with a 16-day partial shutdown of the federal government. Jobs data tomorrow are projected to show hiring slowed in October, helping explain why Federal Reserve policy makers are pressing on with stimulus.

The U.S. is seeing “plow-horse economic growth,” said Robert Stein, deputy chief economist at First Trust Portfolios LP in Wheaton, Illinois. “It’s not going to win the derby, it’s not going to keel over and die,” he added, predicting an acceleration in growth next year.

ECB Rates

Stocks rose as the European Central Bank lowered interest rates to fight a looming deflation risk. The Standard & Poor’s 500 Index advanced 0.1% to 1,772.33 at 9:36 a.m. in New York.

The GDP estimate is the first of three for the quarter, with the other releases scheduled for December when more information becomes available.

Another report showed first-time claims for jobless benefits fell by 9,000 to 336,000 last week, according to the Labor Department.

Inventories added 0.8 percentage point to third-quarter growth. Stockpiles increased at an $86 billion annualized pace after a $56.6 billion rate in the second quarter.

The trade gap and inventories are two of the most volatile components in GDP calculations. A narrowing of the trade deficit added 0.3 percentage point to GDP growth.

Household Spending

The slowdown in household consumption, which accounts for almost 70% of the economy, reflected the smallest increase in spending on services in four years. Utility output decreased in the five months that ended in August, the longest series of declines since early 2001, according to Fed data.

Economists in the Bloomberg survey projected a 1.6% gain in third-quarter consumer spending after a 1.8% advance from April through June.

Final sales, which exclude inventories, increased 2% in the third quarter after a 2.1% gain the prior three months.

Corporate spending on equipment decreased at a 3.7% annualized pace, subtracting 0.2 percentage point from growth, the most in a year. Investment in nonresidential structures slowed.

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