Bloomberg News

Inventory Drop Sets Stage for U.S. Growth Pickup: Economy

November 23, 2011

(Updates with closing market prices in fifth paragraph and Fed minutes in last.)

Nov. 22 (Bloomberg) -- The economy in the U.S. expanded less than previously estimated in the third quarter, reflecting a drop in inventories that points to a pickup in growth as 2011 comes to a close.

Gross domestic product climbed at a 2 percent annual rate from July through September, less than projected and down from a 2.5 percent prior estimate, revised Commerce Department figures showed today in Washington. The median forecast of 81 economists surveyed by Bloomberg News called for no revision. Excluding stockpiles, so-called final sales climbed 3.6 percent, the most since last year’s fourth quarter.

Gains in retail sales, manufacturing and housing this quarter, combined with lean inventories, raise the odds the world’s largest economy will pick up. At the same time, unemployment and stagnant wages mean consumer spending has been fueled by reductions in savings that cast doubt on whether increases will be sustained into 2012, just as the risks from government cutbacks and the European debt crisis intensify.

“We should see a little bit of a bounce in the fourth quarter, then growth will probably grind back down,” said Nariman Behravesh, chief economist at IHS in Lexington, Massachusetts, who correctly forecast the growth figures and expects GDP to expand by 2.5 percent to 3 percent this quarter.

Shares Fall

Stocks fell, driving the Standard & Poor’s 500 Index to its longest slump in almost four months. The gauge dropped 0.4 percent to close at 1,188.04 in New York. Treasuries rose amid concern of contagion from the European debt crisis. The yield on the 10-year note decreased to 1.93 percent from 1.96 percent late yesterday.

Germany today rejected calls from allies and investors to do more to counter market turmoil as Spain’s financing costs surged and pressure mounted on Greek political leaders to submit written commitments to austerity measures.

“We don’t have any new bazooka to pull out of the bag,” Michael Meister, finance spokesman for Chancellor Angela Merkel’s Christian Democratic bloc, said in Berlin today.

The World Bank said China and other export-reliant Asian nations are likely to withstand an escalation of the European debt crisis. The Washington-based development lender said in a semiannual report today that China’s economy, the world’s second-largest, will expand 8.4 percent next year and about that pace thereafter.

Forecasts for U.S. third-quarter growth in the Bloomberg survey ranged from 2 percent to 2.9 percent. The world’s largest economy grew at a 1.3 percent rate in the prior three months.

Corporate Profits

Today’s report also showed U.S. corporate profits climbed at a slower pace last quarter, and the gain in wages and salaries for the period from April through June was cut by more than half, to $38.9 billion from $78.7 billion.

Consumer spending, about 70 percent of the economy, grew at a 2.3 percent annual rate, little changed from the 2.4 percent initial estimate. Purchases added 1.6 percentage points to growth.

“There’s certainly a lot of crummy data out there, whether it’s wages or income or net worth, the unemployment rate doesn’t seem to be moving, but the consumer has held up surprisingly well,” Ron Sargent, chief executive officer of Staples Inc., the world’s largest office-supply retailer, said during a Nov. 15 teleconference.

Less Savings

The savings rate last quarter dropped to 3.8 percent, the lowest since the last three months of 2007. That figure was initially calculated as 4.1 percent. After-tax incomes adjusted for inflation decreased at a 2.1 percent annual rate, the biggest drop since the third quarter of 2009, and revisions showed another decrease in the previous three months rather than the previously calculated gain.

“The savings rate fell very sharply, and that may be an attempt to sustain personal spending, and that’s not doable again,” said John Silvia, chief economist at Wells Fargo Securities LLC in Charlotte, North Carolina. “Over time they’re going to have to come to grips with the reality that they just don’t have whatever it takes to sustain their spending.”

Today’s report offered a first look at corporate profits. Earnings climbed 2.1 percent from the prior quarter, after rising 3.3 percent in the prior period. They increased 7.9 percent from the same time last year.

Income Gain

Gross domestic income was also reported today for the first time. The measure, which shows the money earned by the people, businesses and government agencies whose purchases go into calculating growth, rose at a 0.4 percent annual rate from July through September after adjusting for inflation. According to Federal Reserve research, GDI may be a better gauge of the economy.

Inventories were a greater drag on the economy last quarter than first estimated. They were cut at an $8.5 billion annual rate, subtracting 1.6 percentage points from growth, compared with a 1.1 percent previous estimate. It was the first time stockpiles were trimmed since the last three months of 2009.

Fewer inventories put producers on track to ramp up output heading into the holiday season. Restocking will boost growth by 0.8 percentage points in the fourth quarter, according to economists at JPMorgan Chase & Co in New York.

They now see GDP rising 3 percent in the final quarter, up from a previous prediction of 2.5 percent. They project a slowdown to 0.5 percent in the first three months of 2012.

Debt Talks

Yesterday, lawmakers on a special debt-reduction committee announced they failed to reach agreement and dissolve congressional gridlock. Stocks tumbled, extending last week’s declines, amid concern the government will be forced to submit to $1.2 trillion in automatic spending cuts. The Standard & Poor’s 500 Index lost 1.9 percent, to close at 1,192.98 in New York.

The near-term issue is not the automatic budget cuts that will take effect starting 2013, rather it’s the expiration at the end of this year of the temporary reductions in payrolls taxes and the extension of jobless benefits, according to Michael Feroli, chief U.S. economist at JPMorgan.

“While the fate of those measures are not directly tied to the supercommittee, this week’s failure to come to an agreement probably reduces the likelihood some that those programs get extended,” Feroli said in a note to clients yesterday. “Thus we can expect a noticeable drag from fiscal consolidation early next year.”

European Crisis

The European Central Bank stepped up bond purchases last week as the debt crisis worsened, spending Italian and Spanish bond yields soaring. Growth in Germany, Europe’s largest economy, may slow to a near standstill next year as the region’s debt crisis saps demand for exports, the Bundesbank also said yesterday.

Some Federal Reserve policy makers said the central bank should consider easing policy further, according to minutes of their Nov. 1-2 meeting released today. The Fed also told the largest U.S. banks to test their loan portfolios and trading books against a severe recession and a European market shock, according to a separate report issued today.

--With assistance from Rich Miller and Chris Middleton in Washington. Editors: Carlos Torres, Christopher Wellisz

To contact the reporter on this story: Alex Kowalski in Washington at akowalski13@bloomberg.net

To contact the editor responsible for this story: Christopher Wellisz in Washington at cwellisz@bloomberg.net


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