Washington DC, Nov 29, 2017 — The U.S. economy grew faster than initially thought in the third quarter, notching its quickest pace in three years, as increases in business investment in inventories and equipment offset a moderation in consumer spending.
Gross domestic product expanded at a 3.3 percent annual rate in the third quarter also boosted by a rebound in government spending, the Commerce Department said in its second GDP estimate on Wednesday.
That was the fastest pace since the third quarter of 2014 and a pickup from the second quarter’s 3.1 percent rate.
The economy was previously reported to have grown at a 3.0 percent pace in the July-September period. It was the first time since 2014 that the economy experienced growth of 3 percent or more for two straight quarters.
The growth pace, however, likely exaggerates the health of the economy as inventories, goods yet to be sold, contributed 0.8 percentage point to third-quarter GDP growth – up from the previously reported 0.73 percentage point.
Excluding inventory investment, the economy grew at a 2.5 percent rate. When measured from the income side, output also expanded at a 2.5 percent rate. The government said after-tax corporate profits surged at a 5.8 percent rate last quarter after rising at only a 0.1 percent pace in the second quarter.
Economists polled by Reuters had expected that third-quarter GDP growth would be raised to a 3.2 percent rate. The brisk growth pace strengthens the case for the Federal Reserve to raise interest rates next month. The U.S. central bank has increased borrowing costs twice this year.
The economic recovery since the 2007-2009 recession is now in its eighth year and showing little signs of fatigue. The economy is being powered by a tightening labor market, which has largely maintained a strong performance that started during former President Barack Obama’s first term.
Economists see a modest boost to growth from efforts by President Donald Trump and his fellow Republicans in Congress to push through a broad package of tax cuts, including slashing the corporate income tax rate to 20 percent from 35 percent.
Trump wants lower taxes to lift annual GDP growth to 3 percent on a sustained basis. The fiscal stimulus would, however, come when the economy is at full employment.
CONSUMER SPENDING TRIMMED
Businesses accumulated inventories at a $39.0 billion pace in the third quarter, instead of the previously reported $35.8 billion rate. That suggests inventories could be a drag on growth in the fourth quarter.
Data on Tuesday showed a drop in wholesale and retail inventories in October, leading economists to slash their fourth-quarter GDP growth estimates.
Growth in consumer spending, which accounts for more than two-thirds of the U.S. economy, was revised down to a 2.3 percent rate in the third quarter from the previously reported 2.4 percent pace. Consumer spending increased at a robust 3.3 percent rate in the second quarter.
The deceleration in consumer spending likely reflects the impact of Hurricanes Harvey and Irma, which struck Texas and Florida during the quarter. Spending also is being constrained by sluggish wage growth, which is forcing households to dip into their savings to fund purchases.
The saving rate was lowered to 3.3 percent in the third quarter from the previously reported 3.4 percent. Economists say savings cannot drive consumer spending indefinitely, which has left many to expect quarterly GDP growth to slow.
Growth in business investment in equipment was raised to a 10.4 percent pace, the fastest growth pace in three years, from the previously reported 8.6 percent rate. Business spending has been buoyed by expectations of hefty corporate tax cuts.
Investment in nonresidential structures fell at a 6.8 percent pace in the third quarter, the biggest drop since the fourth quarter of 2015, instead of the previously estimated 5.2 percent rate. That is largely because of a slowdown in spending on oil and gas well drilling.
Growth in government spending was raised to a 0.4 percent rate. Government outlays were previously reported to have declined at a 0.1 percent pace in the third quarter. Government spending had contracted for two consecutive quarters. – Reuters