Inventory Correction Masks Resilient Demand in U.S. GDP Report

U.S. Economic Growth Slows to 1.5% in Third-Quarter
  • Slower inventory investment subtracts most from GDP since 2012
  • Economy in third quarter expands 3% excluding unsold goods

America’s economy pulled back in the third quarter as companies cleared out inventory. Beneath the surface, though, the government’s tally of gross domestic product showed buoyant consumer and business spending.

GDP, the sum of all goods and services produced in the U.S., rose at a 1.5 percent annualized rate after a 3.9 percent pace in the previous three months. Had it not been for the biggest inventory swing since 2011, the world’s largest economy would have grown 3 percent.

Household purchases, buoyed by job and income gains, will probably remain a mainstay of the economy even as weaker sales to overseas customers hold back exports and manufacturing. The quick re-balancing of stockpiles, which brings them more in line with demand heading into the holiday season, indicates factory production will soon stabilize, eliminating a source of weakness.

“The headline is not indicative of how solidly the U.S. is growing,” said Gennadiy Goldberg, U.S. rates strategist in New York with TD Securities, who correctly projected the third-quarter gain. “The domestic drivers in consumption are quite strong.”

Final sales to domestic purchasers, or GDP excluding the trade and inventories categories, advanced at a 2.9 percent annualized rate after a 3.7 percent pace in the second quarter.

The third-quarter GDP print was in line with the 1.6 percent median projection in a Bloomberg survey of 80 economists. The estimate is the first of three for the quarter, with the other releases scheduled for November and December when more information becomes available.

The economy grew at an average 2.3 percent pace in the first half of the year as a 3.9 percent surge in the second quarter more than made up for a first-quarter slowdown caused by bad weather, a labor dispute at West Coast ports and weakness in the energy industry. GDP expanded 2.4 percent in 2014.

A separate report from the Labor Department Thursday showed the number of applications for unemployment benefits was little changed last week, hovering near the lowest levels in four decades. Jobless claims rose by 1,000 to 260,000 in the period ended Oct. 24.

Consumer Spending

The third-quarter growth estimate reflected an annualized 3.2 percent gain in household purchases, which account for almost 70 percent of the economy. Personal consumption added 2.2 percentage points to growth. In the previous three months, spending by consumers rose at a 3.6 percent pace.

Stable employment in 2015 and cheaper prices at the pump have helped pad Americans’ pocketbooks. While payrolls advanced at a slower pace than forecast in August and September, the pace of hiring this year has averaged almost 200,000 a month, beating the annual average for seven of the 10 years through 2014.

After-tax incomes adjusted for inflation climbed at a 3.5 percent annual rate, almost three times the 1.2 percent gain in the prior three months, Thursday’s GDP report showed. That allowed the saving rate to increase to 4.7 percent from 4.6 percent, indicating consumers have plenty of firepower to continue to drive growth.

Cheaper Gasoline

What’s more, gasoline costs have been receding for the past two months. The average price of a gallon of regular-grade fuel is less than $2.20, the cheapest since February, according to motoring group AAA. That compares with a daily average of $3.34 in 2014.

The 3 percent gain in third-quarter inflation-adjusted final sales, GDP minus inventories, followed a 3.9 percent jump in the prior three months. In addition to resilient consumer spending, homebuilding and business purchases expanded at respectable rates last quarter. Outlays for new equipment climbed by the most in a year. 

However, spending on intellectual property such as software and research and development grew the least in two years and further cutbacks on drilling rigs and mines resulted in a drop in investment in nonresidential structures.

Biggest Drag

A smaller gain in inventories subtracted 1.4 percentage points from growth, the biggest drag since the last three months of 2012, according to the Commerce Department. An annualized $59.8 billion slowdown from the prior quarter was the largest since the third quarter of 2011.

“The story on inventories is that it’s a big adjustment that occurred quickly, and should be far less of a drag” in the next few quarters, Stuart Hoffman, chief economist at PNC Financial Services Group Inc. in Pittsburgh, said before the report.

The data also showed little change in America’s trade deficit, while government spending advanced as gains in federal non-defense and state and local outlays made up for a drop in military procurement.

Monetary Policy

Federal Reserve policy makers said at the close of their two-day meeting in Washington Wednesday that they will consider tightening policy at their next meeting in December, without making a commitment to act this year as the economy continues to expand at a “moderate” pace.

The officials removed a line from September’s meeting statement about global economic and financial developments restraining economic activity, and added a reference to the possibility of increasing the rate at the “next meeting” based on “realized and expected” progress in reaching their employment and inflation goals.

The GDP report “does show you that perhaps the Fed was right to jawbone the markets back into pricing in a 2015 rate hike,” Goldberg said.

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