Economy in U.S. Expands at a 2.8% Rate on Inventories

Nov. 7 (Bloomberg) -- The economy in the U.S. expanded in the third quarter at a faster pace than forecast, led by the biggest increase in inventories in more than a year as household purchases and business investment slowed. Michael McKee reports on Bloomberg Television's "In The Loop." (Source: Bloomberg)

Household purchases and business spending on equipment slowed in the third quarter, even as a buildup in inventories unexpectedly boosted the pace of economic growth in the U.S.

The 2.8 percent annualized gain in gross domestic product followed a 2.5 percent increase in the prior three months, Commerce Department figures showed today in Washington. Final sales, which exclude unsold goods, rose 2 percent in the third quarter as consumer spending climbed at the slowest pace since 2011 and corporate investment fell.

The biggest gain in inventories since the beginning of 2012 risks holding back the economy this quarter as companies limit production. A 16-day partial shutdown of the federal government added to the headwinds that the Federal Reserve is trying to offset by maintaining $85 billion in monthly bond purchases intended to keep borrowing costs low.

“You’ve got this big jump in inventories, and that’s clearly in excess of what the flow of spending is,” said John Silvia, chief economist at Wells Fargo Securities LLC in Charlotte, North Carolina, who projected a 1.9 percent gain in final sales. “If you stockpile all this inventory but your sales don’t really change all that much, then what you’re going to do in the next quarter is cut back.”

Photographer: Luke Sharrett/Bloomberg

Demand held up at the start of the fourth quarter for General Motors Co. and Ford Motor Co. as sales rebounded in the last few weeks of October. Cars and light trucks sold at a 15.2 million annual rate last month, matching the September pace. Close

Demand held up at the start of the fourth quarter for General Motors Co. and Ford Motor... Read More

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Photographer: Luke Sharrett/Bloomberg

Demand held up at the start of the fourth quarter for General Motors Co. and Ford Motor Co. as sales rebounded in the last few weeks of October. Cars and light trucks sold at a 15.2 million annual rate last month, matching the September pace.

Economists at Morgan Stanley, Credit Suisse, TD Securities USA LLC and HSBC Securities America were among those who said they might reduce their forecasts for GDP.

“Fourth-quarter growth appears to be on a trajectory for growth a bit below 1.5 percent at this point,” Morgan Stanley economists said in an e-mail to clients.

Stocks Decline

Stocks declined as investors weighed the GDP figures and the European Central Bank’s decision to lower interest rates to fight a looming deflation risk. The Standard & Poor’s 500 Index fell 1.3 percent to 1,747.15 at the close in New York.

Other reports today showed claims for unemployment benefits declined last week and consumer confidence fell to the lowest level in a year.

First-time claims for jobless benefits fell by 9,000 to 336,000 last week, according to the Labor Department, indicating firings haven’t picked up following the government shutdown.

“We’re still seeing a very low trend of job destruction, but this is just one side of the equation,” said Scott Brown, chief economist at Raymond James & Associates Inc. in St. Petersburg, Florida. “The big issue for the job market over the last couple of years has not been job losses, it’s really been an issue of job creation, and that’s what we’re waiting for.”

Consumer Comfort

The Bloomberg Consumer Comfort Index declined to minus 37.9 in the week ended Nov. 3, the worst reading since October 2012, from minus 37.6. The one-week drop was the smallest since the partial government shutdown ended in the middle of last month.

Payroll additions have slowed, averaging 143,000 from July through September after 195,000 a month in the first half of the year. Labor Department figures tomorrow are projected to show an increase of 120,000 for October, according to a Bloomberg survey median.

Estimates of the 87 economists surveyed for third-quarter GDP, the value of all goods and services produced, ranged from 1.2 percent to 3 percent. The data, initially slated for release on Oct. 30, were delayed by the government shutdown.

The GDP estimate is the first of three for the quarter, with the other releases scheduled for December when more information becomes available.

Inventories added 0.8 percentage point to third-quarter growth, twice as much as in the previous three months. Stockpiles increased at an $86 billion annualized pace after a $56.6 billion rate in the second quarter.

Trade Deficit

The trade gap and inventories are two of the most volatile components in GDP calculations. A narrowing of the trade deficit added 0.3 percentage point to growth.

The 1.5 percent annualized gain in household consumption, which accounts for about 70 percent of the economy, compared with a 1.6 percent median forecast in the Bloomberg survey and followed a 1.8 percent advance from April through June.

Spending was held back by a slowdown in demand for services, which grew at a 0.1 percent pace, the smallest advance in four years. Utility output decreased in the five months that ended in August, the longest series of declines since early 2001, according to Fed data.

One bright spot for the economy this year has been motor vehicle sales as Americans take advantage of cheaper borrowing costs to replace older models. Cars and light trucks sold at a 15.2 million annual rate last month, matching the September pace, according to Ward’s Automotive Group data.

‘Some Softness’

“What we saw early in the month was some softness, but we were very encouraged when we saw the retail demand in the industry bounce back,” John Felice, vice president of U.S. marketing, sales and service at Ford Motor Co. (F), said on a conference call.

Corporate investment on equipment decreased at a 3.7 percent annualized pace, reflecting in part a drop in demand for transportation gear, today’s GDP data showed.

Residential construction increased at a 14.6 percent annualized rate, adding 0.4 percentage point to growth.

Government spending rose at a 0.2 percent pace, reflecting a pickup in state and local outlays. Spending by federal agencies declined at a 1.7 percent pace.

Estimates for federal spending show the effects of administrative furloughs associated with across-the-board budget cuts known as sequestration. Excluding the furloughs, U.S. government outlays would have been little changed in the quarter.

Budget Impasse

Economic growth this quarter will be less than economists projected at the start of the budget impasse that began Oct. 1. GDP will expand at a 2 percent annualized rate, according to the median projection in a Bloomberg survey on Oct. 31, down from a 2.4 percent forecast in an Oct. 4-9 survey.

The figure will reflect a decline in government output, estimated by the number of hours put in by federal workers, as well as cutbacks at contractors, economists said.

The effect of the budget impasse on the economy, the recent slowdown in job growth and a pause in the housing market help explain why U.S. central bankers are continuing with $85 billion in monthly asset purchases.

“The recovery in the housing sector slowed somewhat in recent months,” the central bank said in the Oct. 30 release. “Fiscal policy is restraining economic growth.”

To contact the reporter on this story: Shobhana Chandra in Washington at schandra1@bloomberg.net

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

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