U.S. Shows Solid Third Quarter Growth, But Spending Weakens

By Beacon Staff

WASHINGTON — The U.S. economy showed surprising growth from July through September just before the government’s partial shutdown.

But much of the gain came from a buildup in company stockpiles. Consumers and businesses slowed their spending — a cautionary sign for the current quarter and early 2014.

Americans did purchase more autos and other long-lasting goods. Yet most analysts say the economy isn’t showing enough underlying strength to cause the Federal Reserve to scale back its stimulus any time soon.

Overall, growth accelerated to a 2.8 percent annual rate in the third quarter, the Commerce Department said Thursday. That’s up from a 2.5 percent rate in the April-June quarter. And it’s nearly a full percentage point higher than economists had predicted.

Home construction rose at a double-digit pace, and state and local governments spent at their fastest rate in four years.

Still, the bulk of the unforeseen strength came from the buildup in company inventories. That suggests businesses overestimated consumer demand.

“The economy grew more rapidly than anticipated in the summer but for the wrong reason, due to an unwanted buildup in inventories” said Sung Won Sohn, an economics professor at the Martin Smith School of Business at California State University.

Many analysts forecast that growth is weakening in the current quarter to an annual rate below 2 percent.

Sohn said businesses are now forced to cut back on their restocking to thin out the unwanted inventories. He also said companies are likely to hold off on hiring, which would weigh further on consumer spending.

The anticipated pullback from businesses comes at a critical time. Economists estimate that the shutdown will cut nearly half a percentage point from overall growth in the fourth quarter.

Still, not all analysts viewed the third-quarter report as troubling. Joseph LaVorgna, chief U.S. economist at Deutsche Bank Securities, believes the solid growth is the start of robust second half of the year.

Consumers spent more on big purchases in the third quarter, he notes. That’s a sign of confidence. And he points to recent surveys of manufacturers, which show factories are ramping up production in anticipation of greater demand.

He predicts growth will strengthen in the fourth quarter to an annual rate of 3.5 percent. If correct, that would be the strongest quarter for the economy in nearly two years.

“People say the consumer is weak … but if you delve deeper into the data, the weakness is in services,” he said. “The consumer is doing better than you think especially on the items that are most cyclical” such as autos.

Consumer spending weakened to a 1.5 percent annual growth rate from a 1.8 percent rate in the previous quarter. It was slowed by flat spending on services. This category includes everything outside manufacturing and makes up about two-thirds of all purchases. One reason was a steep drop in utility spending as unseasonably cool summer cut into demand for power.

By contrast, consumer spending on goods surged at a 4.3 percent annual rate, the fastest in a year and a half. The gain was led by 7.8 percent annual growth in spending on autos and other long-lasting manufactured goods.

Spending by consumers is critical to growth because it drives roughly 70 percent of economic activity. Higher taxes this year and slow wage growth have weighed on consumers since the start of the year.

Exports rose at a 4.5 percent rate in the third quarter, helped by stronger economies overseas. Still, businesses cut back on investment in equipment by the most in a year.

Overall government activity grew at a slight 0.2 percent rate, reflecting a 1.5 percent rise in state and local government spending — the best showing since the spring of 2009. Federal government spending dropped again, falling at a 1.7 percent annual rate.

The shutdown did not affect third-quarter growth. But it cost the U.S. economy an estimated $24 billion in October, according to Beth Ann Bovino, an economist at Standard & Poor’s.

Economists are still optimistic that 2014 will be a better year. But that hinges on lawmakers avoiding another shutdown and reaching an agreement to fund the government past Jan. 15.

Most economists agree that the dimmer outlook means the Fed is likely to maintain its $85 billion-a-month in bonds purchases through March. The purchases are intended to keep long-term interest rates low and encourage more borrowing and spending.

“The economy is not growing at a strong enough rate for the Fed to think that cutting back on its support makes sense,” said Joel Naroff, chief economist at Naroff Economic Advisors.

U.S. Unemployment Benefit Applications Fall
WASHINGTON — The number of people seeking U.S. unemployment benefits fell 9,000 to a seasonally adjusted 336,000 last week, bringing applications to pre-recession levels.

The Labor Department said Thursday that the less volatile four-week average dropped 9,250 to 348,250. The average was elevated by the 16-day partial government shutdown and backlogs in California that occurred because of computer upgrades. Weekly applications have fallen for four straight weeks.

Applications are a proxy for layoffs. The decline suggests companies are cutting very few workers. Still, they are not hiring many new ones. Falling applications are typically followed by more job gains. But hiring has slowed in recent months, rather than accelerated.

The economy added an average 143,000 jobs a month from July through September. That’s down from an average of 182,000 in April through June, and 207,000 during the first three months of the year.

October’s jobs report, to be released Friday, likely will look even weaker. Economists expect that employers added just 122,000 jobs, and the unemployment rate rose to 7.3 percent, according to FactSet.

But much of the weakness in October’s jobs report will likely reflect the temporary impact of the shutdown. Most economists expect any spike in the jobless rate will be reversed in November.

The economy was strengthening ahead of the shutdown, the government said Thursday in a separate report. Growth accelerated at a 2.8 percent annual rate in the July-September quarter, up from a 2.5 percent rate in the April-June quarter.

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