US economy grows less than forecast Thursday, 24 November 2011 06:59

By Alex Kowalski

The economy 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 2pc annual rate from July through September, less than projected and down from a 2.5pc 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 3.6pc, 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 fuelled 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, Mass., who correctly forecast the growth figures and expects GDP to expand by 2.5pc to 3pc this quarter.

Growth forecasts in the Bloomberg survey ranged from 2pc to 2.9pc. The world’s largest economy grew at a 1.3pc rate in the prior three months.

The report also showed 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 $38.9bn from $78.7bn.

Consumer spending, about 70pc of the economy, grew at a 2.3pc annual rate, little changed from the 2.4pc 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 November 15 teleconference.

The savings rate last quarter dropped to 3.8pc, the lowest since the last three months of 2007. That figure was initially calculated as 4.1pc.

After-tax incomes adjusted for inflation decreased at a 2.1pc 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 in Charlotte, NC.

“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.”

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

Gross domestic income was also reported Tuesday 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 0.4pc 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 $8.5bn annual rate, subtracting 1.6 percentage points from growth, compared with a 1.1pc 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 in New York.

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

WP-Bloomberg

| More...