Last week we learned the U.S. economy grew 2.7 percent in the third quarter, a good bit faster than the 2 percent originally estimated. On the face of it, that’s good news. But most economists took one look at the revised data and immediately chopped their estimates for fourth-quarter growth. What spooked them? One word: inventories.
Businesses spent a whole lot more money restocking their shelves in the third quarter than they did in the second—$61.3 billion vs. $41.4 billion. That’s much faster than the fundamentals would support. In fact, total sales were actually revised down in the third quarter. In the face of slowing consumer demand, it’s going to take a while for businesses to sell all that stuff they bought over the summer, and they probably won’t be purchasing much of anything toward the end of the year.
That means a lean fourth quarter. The average forecast of the 73 economists surveyed by Bloomberg News is for the economy to grow 1.57 percent over the last three months of 2012. It was expected that the economy would sputter at year’s end as the so-called fiscal cliff loomed, but even as late as October, economists were forecasting an average growth rate of nearly 2 percent in the fourth quarter.
On Wednesday, Goldman Sachs (GS) revised its fourth-quarter projection down to 1 percent. The folks at RBC Capital Markets are even more pessimistic, and expect the economy to essentially stagnate during the last three months of the year. “Our estimate is slightly above zero at 0.2 percent,” says Jacob Oubina, RBC’s senior U.S. economist. Oubina says he was projecting 1 percent growth before the recent revision. But after seeing all that inventory growth get pulled into the summer, he and his fellow RBC economists slashed their forecasts. “That revision is what knocked us down.”
The trouble with a slowdown in business inventory spending is that it hits the top of the production cycle and turns into a headwind for so many other parts of the economy. When businesses stop buying more raw materials, that translates into softer demand for manufacturers, which then cut production and reduce employment, which then hits consumption. It usually takes a few months to trickle through to the economy. “We’re only starting to see the signs of a hit to employment,” Oubina says.