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US economy grew faster than thought in third quarter

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US President Barack Obama delivers a statement on the Hurricane Sandy situation from the press briefing room of the White House. Photo: Reuters

US President Barack Obama delivers a statement on the Hurricane Sandy situation from the press briefing room of the White House. Photo: Reuters

US President Barack Obama delivers a statement on the Hurricane Sandy situation from the press briefing room of the White House. Photo: Reuters

THE U.S. economy grew faster than initially thought in the third quarter as restocking by businesses provided a big boost, but consumer and business spending were revised lower in a sobering reminder of the recovery's underlying weakness.

Gross domestic product expanded at a 2.7pc annual rate, the Commerce Department said on Thursday, as export growth also helped to offset the weakest consumer spending and first drop in business investment in more than a year.

While the growth pace was much quicker than the 2pv rate the government estimated last month and the best since the fourth quarter of 2011, it was hardly a sign of strength as the lift from inventories will likely be lost in the fourth quarter.

The economy is also bracing for deep cuts in government spending and tax increases early next year, known as the fiscal cliff, which could suck $600 billion from the economy and fuel a fresh recession.

Economists polled by Reuters had expected GDP growth to be raised to a 2.8pc pace.

"The bulk of the (GDP) rise is inventory adjustment," said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington. "So I think the market may look past this number, thinking real GDP in the economy is a bit lower. It was also concerning to see consumer spending revised down."

A separate report from the Labor Department showed initial claims for state unemployment benefits dropped 23,000 to a seasonally adjusted 393,000, but still staying elevated after superstorm Sandy.

The storm, which ripped through the East Coast in late October, has distorted initial claims data in recent weeks, making it hard to get a clear pulse of the labor market, whose struggles have underscored the economy's weakness.

U.S. stock index futures held gains after the data. Prices on longer-dated U.S. Treasury debt pared losses, while the euro held against the dollar.

INVENTORIES ADD, NOT SUBTRACT

Business inventories added 0.77 percentage point to third-quarter GDP growth. They were previously estimated to have subtracted 0.12 percentage point.

Excluding inventories, GDP rose at a revised 1.9pc rate, underscoring sluggish demand. Final sales of goods and services produced in the United States had been previously estimated to have increased at a 2.1pc pace.

A smaller trade deficit was also a factor behind the upward revision to GDP as export growth outpaced a rise in imports. But the trend in exports is unlikely to be sustained given slowing global demand, especially in China and debt troubled Europe.

Trade contributed 0.14 percentage point to GDP growth instead of subtracting 0.18 percentage point, as previously reported.

Other details of the report were rather weak. Consumer spending, which accounts for about 70pc of U.S. economic activity, was lowered to a 1.4pc growth rate - the slowest since the second quarter of 2011, from the 2pc gain previously reported. Consumer spending increased at a 1.5pc rate in the second-quarter.

Business spending was revised to show much deeper cutbacks, which have been blamed on the fears a tightening in fiscal policy next year. Business investment fell at a revised 2.2pc rate instead of a 1.3pc decline. That was the first drop since the first quarter of 2011.

Part of the drag in business investment, which had been a source of strength for the economy, came from equipment and software, where spending was the weakest since the second quarter of 2009.

The report also showed that after-tax corporate profits rose at a 3.3pc rate in the third quarter after gaining 2.2pc in the second quarter.

Spending on nonresidential structures contracted after five straight quarters of growth. Government investment was revised to a 3.5pc growth rate from 3.7pc as defence, and state and local government spending estimates were pared.

Growth in home building was trimmed to a 14.2pc rate from 14.4pc. Residential construction is benefiting from the Federal Reserve's ultra accommodative monetary policy stance, which has driven mortgage rates to record lows.

Reuters