WASHINGTON – The U.S. economy grew at a solid 4.1 per cent annual rate from July through September, the fastest pace since late 2011 and significantly higher than previously thought. Much of the upward revision came from stronger consumer spending.
The Commerce Department’s final look at growth in the summer was up from a previous estimate of 3.6 per cent. Four-fifths of the revision in the report released Friday came from stronger consumer spending, mainly in the area of health care.
The 4.1 per cent annual growth rate in the third quarter, as measured by the gross domestic product, came after the economy had expanded at a 2.5 per cent rate in the second quarter. Much of the acceleration reflected a buildup in business stockpiles.
On Friday, President Barack Obama pointed to the upward revision to GDP growth as one of several signs of improvement in the economy. They include four straight months of solid job growth and a drop in the unemployment rate to its lowest point in five years.
“What it adds up to is we head into next year with an economy that’s stronger than it was when we started the year,” Obama said at a White House news conference. “I firmly believe that 2014 can be a breakthrough year for America.”
The GDP report also gave a boost to Wall Street. The Dow Jones industrial average was up about 80 points in late afternoon trading.
Economists still expect growth to slow a bit in the current October-December quarter. In part, that’s because two-fifths of the third-quarter gain in GDP came from a buildup in business stockpiles. That gain isn’t likely to be repeated in the fourth quarter. Many analysts think growth will slow to an annual rate between 2.5 per cent and 3 per cent this quarter before picking up next year.
The third-quarter increase in GDP —the economy’s total output of goods and services — was the best performance since a 4.9 per cent increase in the final three months of 2011.
Still, analysts expect that for the year, the GDP will expand only around 1.7 per cent, down from the 2.8 per cent growth of 2012. Much of that drop-off occurred because consumer spending was depressed by higher taxes that took effect last January and the government’s across-the-board spending cuts. The Congressional Budget Office has estimated those two factors shaved 1.5 percentage points from growth in 2013.
But the drag from the government is expected to lessen in 2014. Many analysts are looking for growth to hit 2.5 per cent or better in 2014.
Outside the volatility caused by changes in stockpiles, many analysts say the economy has begun to improve in the current quarter. Steady hiring has lowered the unemployment rate to a five-year low of 7 per cent. And much of the November data so far have been upbeat.
Consumer spending at retail businesses rose by the most in five months. Factories increased output for the fourth straight month, led by a surge in auto production. Builders broke ground on homes at the fastest pace in more than five years, strong evidence that the housing recovery is accelerating despite higher mortgage rates. Auto sales haven’t been better since the recession ended 4 1/2 years ago. And the stock market is at all-time highs.
Analysts will pay close attention to consumer spending in the fourth quarter. It drives 70 per cent of economic growth.
The government significantly boosted consumer spending in Friday’s revised data, increasing it to a 2 per cent growth rate, up from just 1.4 per cent in the previous estimate, which has been the slowest pace since late 2009.
Economists said Friday that the new-found strength in the third quarter was an encouraging development but the period was still dominated by an unsustainable buildup in inventories which will act as a drag on growth in the current quarter.
Pierre Ellis, an economist at Decision Economics, said that the final look at third quarter GDP did offer hope that growth will strengthen in coming months, given the greater strength in consumer spending.
Congress gave final approval Wednesday to legislation that reduces federal spending cuts and averts the risk of another government shutdown early next year. The prospect of less fiscal drag next year has led many economists to predict a better year for the economy in 2014.
A stronger outlook for the economy and job market prompted the Federal Reserve this week to begin winding down its bond-buying program, which was intended to lower long-term interest rates and encourage more borrowing and spending.
The Fed said Wednesday that it would begin reducing its $85 billion-a-month in bond purchases by $10 billion in January. Fed Chairman Ben Bernanke said that if the economy keeps improving, the bond purchases will be trimmed by similar amounts at coming meetings next year.