U.S. Growth Revised Up, but Year-End Slowdown Is Feared

The Commerce Department said Thursday that gross domestic product expanded at an annual rate of 2.7 percent in the three months ended Sept. 30, well above the 2 percent estimate it initially made in late October. But the revision was driven by increased inventory accumulation and a jump in federal spending — factors unlikely to be repeated in the current fourth quarter, economists said.

What’s more, the revised figures show spending by businesses on equipment and software declined by 2.7 percent in the third quarter, the first decrease since the end of the recession in mid-2009 and a sign of just how cautious many companies have become amid the uncertainty in Washington and slowing growth in Asia and Europe.

“It’s a nice headline number,” said Nigel Gault, chief U.S. economist at IHS Global Insight, of the 2.7 percent rate, “but it exaggerates the underlying momentum in the economy. Sustainable improvements in growth are not driven by inventories.”

The two biggest growth areas in the third quarter — inventory growth and federal spending — “are likely to be minuses in the fourth quarter,” he said. Mr. Gault expects the annual rate to sink to 1 percent this quarter, hurt by a fiscal stalemate in Washington as well as the aftereffects of Hurricane Sandy.

To be sure, there were signs of optimism in Thursday’s data. Residential fixed investment rose 14.2 percent, a sign that the housing recovery is gaining steam. Indeed, a separate report Thursday from the National Association of Realtors showed pending home sales rose to a two-and-a-half-year high.

And not all economists took a pessimistic view. “The economy certainly hasn’t taken off, but it’s nowhere close to a stall,” said David Kelly, chief global strategist for JPMorgan Funds. “The economy is still underperforming its full potential, but once we get past the ‘fiscal cliff’ uncertainty, we could see stronger growth next year.”

The new estimate of growth represents a substantial increase in the level of the second quarter, when the economy grew at a rate of just 1.3 percent. It also marks the fastest rate of expansion since the fourth quarter of 2011, when the economy grew at a 4.1 percent annual pace.

This was the second of the government’s three estimates of quarterly growth. The final figure is scheduled for Dec. 20.

“Over all, it was a disappointing report,” said Michelle Meyer, senior United States economist with Bank of America Merrill Lynch.  The accumulation of inventories went from subtracting 0.1 percentage points from the initial estimate to adding 0.8 percentage points, she said.

    “A lot of that inventory build was unintentional, which suggests a downside risk for the fourth quarter,” she said.  “Businesses had expected stronger sales and consumer spending and were caught off guard.”

    Ms. Meyer said she expected the economy to grow by 1 percent in the fourth quarter and 1 percent in the first quarter of 2013, well below the level needed to bring down the unemployment rate, which stood at 7.9 percent in October.

    On Thursday, the government also reported that first-time unemployment claims dropped by 23,000 to 393,000 last week. But Ms. Meyer cautioned that these figures were much more volatile than usual because of the Thanksgiving holiday as well as Hurricane Sandy.

Article source: http://www.nytimes.com/2012/11/30/business/economy/third-quarter-gdp-growth-is-revised-up-to-2-7.html?partner=rss&emc=rss