Inventories, exports boost growth, but consumer spending softer
By Jeffry Bartash, MarketWatch
WASHINGTON (MarketWatch) — The U.S. grew much faster in the third quarter than originally reported, but softer consumer spending and business investment suggest the economy did not enter the final three months of 2012 with a head of steam.
Gross domestic product expanded at a 2.7% rate from July through September, up from 2% in the government’s ”advance” estimate.
That’s the fastest rate of growth since a 4.1% spurt in 2011’s fourth quarter and the best third-quarter performance in five years, according to Commerce Department records.
The third quarter’s improved growth stemmed from a big increase in corporate inventories, higher defense spending and stronger net exports. Precise figures for trade and inventories are not available in the first version of GDP, so the government makes its own estimate.
Yet the increase in consumer spending was much lower than initially estimated, casting a shadow over the upward revision in overall growth. Read: Third quarter not as hot as it looks.
Consumer spending was revised down to 1.4% from 2%.
What’s more, business investment in capital goods was changed to a 2.2% decline from a 1.3% drop. Spending on equipment and software slumped 2.7% instead of being flat.
Business investment could suffer again in the fourth quarter, too. Some businesses have delayed projects and others threaten to do so unless Washington acts quickly to avert more than $500 billion in spending cuts and tax hikes set to take effect after Jan. 1 — what’s known as the fiscal cliff.
In recent action, U.S. investors appeared to shrug off the report and focused instead of negotiations in Washington avoid a budget crisis. See Market Snapshot.
Slower consumer spending and the decline in business investment suggest the faster level of growth in late summer is unsustainable. Economists surveyed by MarketWatch forecast U.S. growth to taper off to 1.6% in the final three months of the year.
The keys are whether the fiscal cliff is averted and consumer spending picks up — personal consumption accounts for as much as 70% of the U.S. economy.
Businesses increased inventories by $61.3 billion in the third quarter, compared with $41.4 billion in the second quarter. The surprising buildup means companies could ratchet back production in the fourth quarter unless they see strong demand for their products. Otherwise they won’t continue to produce goods at the same rate.
The economy also got a big boost from defense spending in the third quarter that’s unlikely to last. Military outlays surged 12.9% after falling in the prior three quarters.
“Although GDP growth was revised up to 2.7% from 2.0%, this was not a healthy report,” said chief economist Nigel Gault of IHS Global Insight, referring to the spikes in defense spending and inventories. “These won’t be repeated – in fact they’ll probably go into reverse in the fourth quarter.”
Still, the third-quarter numbers suggest the economy is strong enough to withstand some fallout if Washington can’t reach a budget deal in time. The GDP report is the broadest measure of an economy’s health, represents the value of all goods and services produced in the U.S.
Final sales was revised down to 1.9% from 2.1%, but that’s relatively healthy. The closely followed category is a good proxy for how much demand exists in the economy and it suggests businesses and consumers continue to spend at a moderate pace.
The housing sector, what’s more, has rebounded sharply in 2012 from a historic slump to give the economy another peg to stand on. Investment in the housing sector jumped 14.2% from an original estimate of 14.4%.
Fresh housing data, however, suggests that construction may have leveled off.
Higher exports also gave a small lift to third-quarter growth. Exports rose 1.1% — vs. an initial estimate of a 1.6% decline — while imports rose just 0.1%. A lower trade deficit boosts GDP.
Inflation, meanwhile, remained tame. The PCE index rose 1.6% in the third quarter, or by a smaller 1.1% excluding food and energy.
The increase in disposable income was revised down to 0.5% from 0.8%.
Jeffry Bartash is a reporter for MarketWatch in Washington.