Third-quarter growth in U.S. revised higher on services

Fourth Quarter

JPMorgan Chase & Co. economists project the economy will grow 2% from October through December, up from the 1.5% rate they had penciled in prior to the Commerce Department’s Dec. 12 retail sales report. Barclays Plc has raised its fourth-quarter tracking estimate to 2.3% from 2% before the retail figures.

Domestic final sales, which exclude inventories, increased 2.5% in the third quarter compared with a previously reported 1.9% increase.

Corporate spending on equipment rose 0.2%, compared with a previous reading of no change. Business investment in intellectual property was revised up to a 5.8% increase from 1.7%, reflecting more spending on software.

Further investment will depend on how much confidence companies have that the economy will accelerate.

Honeywell International Inc., whose products range from cockpit controls to thermostats, expects capital expenditures in the range of $1.2 billion or more in 2014, up about 30% from this year.

Capital Spending

“We’re very disciplined in terms of cap-ex,” Chief Financial Officer David Anderson said on the company’s 2014 guidance call on Dec. 17, referring to capital expenditures. “We really have to see the whites of the eyes of the economic return characteristics to really commit.”

Economic indicators “are pointing to just a continued resilience, not exuberance, but resilience and expansion in the U.S. economy,” Anderson added.

Today’s report also included corporate profits. Before-tax earnings rose at a 1.9% rate after climbing at a 3.3% pace in the prior period. They increased 5.7% from the same time last year.

Residential real estate is underpinning the economy, as rising prices boost household wealth and growing demand helps the industry overcome rising mortgage rates.

Home Construction

Home construction increased at a 10.3% annualized rate in the third quarter. While slower than the 13% pace previously reported, the figure primarily reflected revisions to brokers’ commissions and other ownership transfer costs, today’s report showed.

Data from the Commerce Department this week showed that housing starts jumped 22.7% to a 1.09 million annualized rate, the most since February 2008, while permits for future projects also held near a five-year high, indicating that the pickup will be sustained into next year.

Other signs show that fiscal drag, which weighed on growth during 2013, will start to ease. U.S. lawmakers this week passed the first bipartisan federal budget produced by a divided Congress in 27 years, easing $63 billion in automatic spending cuts and averting another government shutdown.

Government outlays increased 0.4% in the third quarter, led by a 1.7% gain in state and local spending that was the same as the previous reading. Federal spending decreased 1.5%.

Fiscal Policy

Tighter fiscal policy has made stimulating the U.S. economy even more of an uphill battle for the Fed. The central bank this week announced it would scale back its bond purchasing program, known as quantitative easing, by $10 billion to $75 billion a month after seeing an improved outlook for the labor market.

“This has been done in the face of a very tight, unusually tight fiscal policy for a recovery period,” Chairman Ben Bernanke said Dec. 18 during a press conference at the conclusion of a two-day meeting of the Federal Open Market Committee. “So I do think it’s been effective, but the precise size the impact is something I think that we can very reasonably disagree about and that work will continue on.”

www.bloomberg.com

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