Consumer, business spending support US third-quarter growth
WASHINGTON: The US economy grew at a fairly healthy clip in the third quarter as strong consumer and business spending offset efforts by businesses to reduce an inventory glut, underscoring its resilience despite a raft of headwinds.
Gross domestic product grew at a 2.0 percent annual pace, instead of the 2.1 percent rate reported last month, the Commerce Department said in its third estimate on Tuesday.
While that was a sharp deceleration from the brisk 3.9 percent pace logged in the April-June period, growth remained around the economy’s long-run potential.
The Federal Reserve last week raised its benchmark overnight interest rate by 25 basis points to between 0.25 percent and 0.50 percent, the first increase in nearly a decade.
The rate hike was a vote of confidence in the economy, which has been buffeted by slower global demand, a strong dollar and spending cuts in the energy sector.
“This is not an economy that is just muddling along. The GDP data today back up the Fed’s decision to liftoff this month and paves the way for more rate hikes early in 2016,” said Chris Rupkey, chief economist at MUFG Union Bank in New York.
While other data on Tuesday showed a surprise 10.5 percent plunge in home resales last month, economists cautioned against reading too much into the drop, noting that new mortgage disclosure rules had caused delays in closing contracts.
The National Association of Realtors said existing home sales tumbled to an annual rate of 4.76 million units, the lowest level since April 2014. The drop is in stark contrast to robust housing starts, new home sales and bullish homebuilder sentiment.
“Demand didn’t change, the processing rules did,” said Sal Guatieri, a senior economist at BMO Capital Markets in Toronto. “Look for a big-time rebound in December, as housing market fundamentals remain constructive, including falling joblessness, still-low mortgage rates, easing loan standards and plenty of pent-up demand from millennials.”US stocks were trading higher, also bolstered by crude oil prices, which eased off multi-year lows. US Treasury debt prices fell and the dollar weakened against a basket of currencies.
When measured from the income side, the economy grew at a 2.7 percent pace, not the 3.1 percent rate reported last month, to account for a modest downward revision to corporate profits.
Businesses accumulated $85.5 billion worth of inventory in the third quarter, instead of the $90.2 billion reported in November. That meant the change in inventories sliced off 0.71 percentage point from third-quarter GDP growth, instead of the 0.59 percentage point the government estimated last month.
A record increase in inventories in the first half of the years left warehouses bulging with unsold merchandise and businesses with little appetite to restock.
Despite efforts to whittle down the stockpiles of unsold goods, inventories remain relatively high and will probably weigh on growth in the fourth quarter. Estimates for fourth-quarter growth are currently around a 2 percent rate.
“The pace of stockbuilding is still quite rapid and implies a continued drag on output going forward as firms clear their shelves,” said Michael Feroli, an economist at JPMorgan in New York. “There is some evidence that this process is well under way in the fourth quarter, though it could conceivably restrain activity on into the first quarter.”
Consumer spending, which accounts for more than two-thirds of US economic activity, grew at a 3.0 percent rate in the third quarter as previously estimated. Spending is being supported by a strengthening labor market and rising home values. Savings, which are near three-year highs, and low inflation are also helping to underpin consumption.
Growth in business spending on equipment was raised to a 9.9 percent rate from a 9.5 percent pace. There were upward revisions to investment in residential construction and government spending.
The drag from trade was slightly larger than previously reported. A measure of private domestic demand, which excludes trade, inventories and government spending, was revised up one-tenth of a percentage point to a 3.2 percent pace.
There was a modest downward revision to investment in nonresidential structures, to account for ongoing spending cuts by energy firms following a collapse in oil prices.