Bloomberg News

Economy in U.S. Grows at 3.6% Rate on Bigger Inventories

December 05, 2013

U.S. GDP

The pickup in GDP followed gains of 2.5 percent in the previous quarter and 1.1 percent in the first three months of the year. Photographer: Patrick T. Fallon/Bloomberg

The U.S. economy expanded more in the third quarter than initially estimated as unsold merchandise piled up at the fastest rate since early 1998, setting the stage for a possible slowdown in the final three months of the year.

Gross domestic product rose at a 3.6 percent annual rate, up from an initial estimate of 2.8 percent and the strongest since the first quarter of 2012, the Commerce Department in Washington said today. The boost from inventories accounted for almost half the gain in growth, while household spending cooled and business investment in equipment stagnated.

Less inventory accumulation combined with the 16-day federal government shutdown are projected to weigh on the world’s largest economy this quarter. At the same time, fewer jobless claims and a pickup in employment indicate improving corporate sentiment, a sign that at least some of the stockpiling was in anticipation of stronger demand.

“When you look at the relative optimism you’ve seen in the business surveys, the most logical explanation for the inventory build is a more positive outlook,” said Lewis Alexander, chief economist at Nomura Holdings Inc. in New York, who forecast 3.5 percent growth. Still, “the big missing ingredient is businesses being sufficiently confident to actually boost hiring and do capital spending.”

Morgan Stanley and BNP Paribas were among firms who lowered fourth-quarter growth estimates on expectations of a slower pace of inventory accumulation. Economists at BNP Paribas reduced their projection to a 0.7 percent rate from a previous forecast of 1.5 percent. Morgan Stanley cut its estimate a 1 percent gain in GDP this quarter, from 1.5 percent previously.

Unintentional Build

“It sounds like companies were hoping for some better demand,” said Harm Bandholz, chief U.S. economist at UniCredit Group in New York. “Consumer spending was slower in the second and third quarters. Altogether, it’s clearly an unwanted inventory buildup.”

Not all economists are convinced. Inventory growth is in line with sales, unfilled orders point to further production gains, auto sales are stronger and factory purchasing managers are upbeat, according to Joseph LaVorgna, chief U.S. economist at Deutsche Bank Securities Inc. in New York.

“While many analysts are quick to dismiss current quarter growth prospects because of the large inventory build last quarter, we do not share this view,” LaVorgna said in an e-mail to clients.

Jobless Claims

Other reports today showed applications for unemployment benefits fell last week to the lowest level in more than two months and consumer confidence rose to the highest level since early October.

Jobless claims slumped by 23,000 to 298,000 in the week ended Nov. 30, the Labor Department said. The data are difficult to adjust for seasonal variations around holidays, so it’s not unusual to see increased volatility at this time of year, a Labor Department spokesman said.

The Bloomberg Consumer Comfort Index increased to minus 31.3 in the period ended Dec. 1 from minus 33.7. The reading was the best for any Thanksgiving week since 2007.

Stocks fell for a fifth day, sending the Standard & Poor’s 500 Index to a two-week low, after improving data boosted bets the Federal Reserve will curb its monthly bond purchases sooner than estimated. The S&P 500 declined 0.4 percent to 1,785.03 at the close in New York.

GDP Forecasts

The median forecast of 77 economists surveyed by Bloomberg predicted a 3.1 percent gain in third-quarter GDP. Forecasts ranged from 2.2 percent to 3.6 percent. The GDP reading is the second of three for the quarter, with the final release scheduled for Dec. 20 when more information becomes available.

Inventories increased at a $116.5 billion annualized pace in the third quarter, the most since the first quarter of 1998, after a previously reported $86 billion rate. In the second quarter, they rose at a $56.6 billion pace. Stockpiles added 1.68 percentage points to GDP last quarter, double the initial estimate and the biggest contribution since the end of 2011.

Final sales, which exclude inventories, increased 1.9 percent after a 2.1 percent gain the prior three months.

Consumers were more frugal in the third quarter. Household spending, which is almost 70 percent of the economy, increased 1.4 percent, the smallest gain since the fourth quarter of 2009. Purchases added 0.96 percentage point to growth last quarter.

Corporate spending on equipment was stagnant in the third quarter, compared with a 3.7 percent decline previously reported.

Business Spending

Such outlays may be slow to improve. Orders for non-defense capital goods excluding aircraft, a proxy for future business investment in computers, electronics and other equipment, declined 0.6 percent in October after falling 1.2 percent the prior month. It was the first back-to-back decrease in a year, Commerce Department data showed today.

A pickup in corporate outlays for buildings helped boost overall non-residential investment at a 3.5 percent annual rate during the third quarter after a 4.7 percent gain the prior three months.

Housing and autos remain bright spots for the economy. Residential construction increased at a 13 percent annualized rate, compared with a previous estimate of 14.6 percent, and added 0.38 percentage point to growth, today’s figures showed.

More home-construction permits were issued in October than at any time in the past five years, a sign the residential real-estate market is gaining momentum heading into 2014, according to data last week from the Commerce Department.

Auto Sales

Auto sales remain on pace for their best year since 2007. General Motors Co. and Chrysler Group LLC led November U.S. sales gains that met or exceeded analysts’ estimates as dealers stepped up promotion of year-end offers to try to trim inventory. The industry’s annualized sales rate improved to 16.3 million in November, the strongest since May 2007, according to Ward’s Automotive Group.

Even as sales increased 7.1 percent in November at Ford Motor Co. (F:US), the Dearborn, Michigan-based automaker said it’s looking to cut back production by 2 percent in the first quarter compared with the same three months this year.

“We’re looking to manage our inventory, manage supply with demand, always,” Erich Merkle, a U.S. sales analyst at Ford, said in a Dec. 3 conference call. “In terms of the production, we are monitoring that very closely for the first quarter, and we could always have the ability, if we choose to, to add some back if necessary.”

The GDP figures also showed Americans’ purchasing power rose at a slower pace. Disposable income adjusted for inflation increased at a 2.9 percent annualized rate from July through September after a 4.1 percent advance in the second quarter.

Revisions to second-quarter personal income showed wages and salaries increased by $77.2 billion, up from the previously reported gain of $54.6 billion. They rose about $46 billion in the third quarter.

The data also offered a first glance at corporate profits. Before-tax earnings rose at a 1.8 percent rate after climbing at a 3.3 percent pace in the prior period. They increased 5.6 percent from the same time last year.

To contact the reporter on this story: Victoria Stilwell in Washington at vstilwell1@bloomberg.net

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


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