GDP up 2.1% in Q3, significantly better than first reported

November 24, 2015 12:25 PM

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 on Tuesday said the nation's gross domestic product grew at a 2.1% annual pace, not the 1.5% 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 senior economist at BMO Capital Markets in Toronto. "Importantly, domestic demand in the U.S. 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% clip, the fastest in a year and an acceleration from the second quarter's 2.2% pace.

The third-quarter's respectable expansion should set up the economy to achieve at least 2% 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.

The GDP revision was in line with economists' expectations.

U.S. 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.

Large Inventory Accumulation

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 U.S. economic activity, grew at a 3.0% rate, down from the 3.2% 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% pace from the previously 3.2% rate. Though there are signs consumer spending slowed early in the fourth quarter, it is likely to remain supported by a tightening labor market, rising house prices, which are raising household wealth, as well as low inflation.

Growth in exports, which have been hurt by a strong dollar and sluggish global demand, were revised to show a slower 0.9 rate of increase. With imports rising at a slightly faster pace than previously reported, that left a trade deficit that subtracted 0.22 percentage point from GDP growth.

Trade was previously reported to have had a neutral impact on GDP 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% rate, rather than the 46.9% pace reported last month.

Investment in nonresidential structures contracted at a 7.1% pace, instead of the previously reported 4.0% rate. However, business spending on equipment was revised up to a 9.5% rate from a 5.3% pace.

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

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