Economy Grows More Than First Estimated on U.S. Stockpiles

Shoppers at a mall in Garden City, New York.

Shoppers at a mall in Garden City, New York.

Photographer: John Taggart/Bloomberg
  • Consumers are flush as wage gains start to pick up momentum
  • Disposable incomes over past year grew by most since 2012

The U.S. economy expanded at a faster pace in the third quarter than previously reported, reflecting a smaller hit from efforts to rein in bloated inventories.

Gross domestic product, the value of all goods and services produced, rose at a 2.1 percent annualized rate, up from an initial estimate of 1.5 percent, Commerce Department figures showed Tuesday in Washington. The report also showed corporate profits slumped while worker incomes jumped.

The consumer continues to power the U.S. economy, with cheap gasoline giving households the means and greater job security giving them the confidence to spend. Still, company stockpiles remained elevated compared with sales, indicating that new orders and production will cool further to clear shelves and warehouses heading into 2016.

“Inventory levels still have to come down, and that’s going to put pressure on the fourth quarter,” said Russell Price, senior economist at Ameriprise Financial Inc. in Detroit, who correctly forecast the GDP revision. “Consumers are still doing very well.”

The rate of growth matched the median forecast of economists surveyed by Bloomberg. Estimates ranged from 1.5 percent to 2.4 percent. The GDP figure is the second of three for the quarter, with the other release scheduled for late December when more information can be incorporated.

First Half

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.

The revisions to third-quarter GDP showed the pickup in growth estimates last quarter was concentrated in stockpiles. Inventories grew at a $90.2 billion annualized rate from July through September, almost twice as much as previously estimated. Still, the slowdown in stockpiling from the second quarter, when it grew at a $113.5 billion rate, reduced growth by 0.6 percentage point. That compared to a previously reported drag of 1.4 points.

Inventories climbed earlier this year as weak growth abroad and a stronger dollar left manufactured goods to pile up in U.S, O’Sullivan said. Bloated stockpiles bolster the headline growth figure, while a drag on GDP occurs as companies trim those inventories to match demand.

Consumer Spending

Household consumption, which accounts for almost 70 percent of the economy, grew at a 3 percent annualized rate, less than the previously estimated 3.2 percent.

The good news for consumers is that incomes are picking up. Wages and salaries rose by $102.7 billion in the third quarter following a $109.4 billion gain in the April through June period that was almost $62 billion larger than previously estimated.

After-tax total personal incomes adjusted for inflation climbed 3.8 percent in the third quarter from the same time in 2014, the biggest year-to-year gain since the end of 2012. That help push the saving rate up to 5.2 percent from 5 percent in the second quarter, indicating consumers have plenty of cash to spend for the holidays.

Tuesday’s report also offered a first look at corporate profits. Pretax earnings dropped 1.1 percent in the third quarter after a 3.5 percent gain in the previous period. The decrease reflected a $30 billion slump in profits from affiliates overseas that was the biggest since the height of the financial crisis at the end of 2008.

Corporate earnings were down 4.7 percent from the same time last year, the largest 12-month drop since the second quarter of 2009.

Last quarter’s growth reading was at odds with data on total earnings. Gross domestic income, which reflects all the money earned by consumers, businesses and government agencies climbed at 3.1 percent rate from July through September following a revised 2.2 percent advance in the second quarter that was stronger than previously estimated.

Although GDP and GDI should theoretically match, they can diverge in the short run because they are derived from different sources. For that reason, the government began issuing a new measure tracking the average of the two, which showed a 2.6 percent gain after a 3 percent advance in the second quarter.

Steady growth in the world’s largest economy is helping to create jobs and push down the unemployment rate, which Federal Reserve policy makers are watching as a gauge of how much slack is left in the labor market. Fed officials are considering raising their benchmark interest rate as soon as next month, should data continue to indicate that the U.S. economy can withstand tighter monetary policy.

Employment Jumps

Payrolls climbed by 271,000 in October, the strongest increase this year, while the jobless rate fell to a seven-year low of 5 percent. Meanwhile applications for unemployment benefits are bouncing around the lowest level in about four decades.

That has yet to generate significant upward pressure on the second part of the Fed’s dual mandate: inflation. Wage acceleration is only nascent, while falling oil and other commodity prices have also held down costs in the U.S.

Fed officials delayed raising rates at their September meeting as risks grew that the global economy would slow, although those concerns seem to have eased. Policy makers are widely expected to increase the federal funds rate by a quarter percentage point when they meet in Washington on Dec. 15-16, for what would be the first rate increase in almost a decade.

(Updates with economist comment in fourth paragraph.)

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