US economy grew faster than expected

The US economy grow at a much faster pace than initially thought in the third quarter, pointing to strengthening fundamentals that should help it weather slowing global demand.

The Commerce Department yesterday raised its estimate of gross domestic product to a 3.9% annual pace from the 3.5% rate reported last month, reflecting upward revisions to business and consumer spending, as well as restocking.

The performance marked the two strongest back-to-back quarters of growth since the second half of 2003 and underscored the economy’s resilience against the backdrop of a recession in Japan and slowing growth in China and the eurozone.

“This report will go some way in providing further confirmation about the sustainability of the current economic recovery,” said Millan Mulraine, deputy chief economist at TD Securities in New York.

Economists had expected growth would be trimmed to a 3.3% pace. When measured from the income side, the economy grew at its fastest pace since the first quarter of 2012.

Other reports yesterday showed consumer confidence hit a five-month low in October, while the pace of house price appreciation moderated further in September.

The third quarter marked the fourth out of the past five quarters that the economy has expanded above a 3.5% pace. Data ranging from manufacturing to employment and retail sales suggest the economy retained some of that momentum early in the fourth quarter.

But given that inventories rose more than previously estimated in the third quarter, businesses might be reluctant to continue restocking at the same pace. As such, fourth-quarter growth is expected to come in below 3%.

Underscoring the economy’s strong fundamentals, growth in domestic demand was raised to a 3.2% pace in the third quarter instead of the previously reported 2.7% pace.

“This is vindication for the Federal Reserve that they downplayed concerns overseas and it’s appropriate to speak about rate hikes next year,” said Christopher Low, chief economist at FTN Financial in New York.

The US central bank is expected to start raising its short-term interest rate sometime in mid-2015. The Fed has kept its benchmark lending rate near zero since December 2008.

Consumer spending, which accounts for more than two-thirds of US economic activity, was revised up to a 2.2% pace in the third quarter from the previously reported 1.8%.

Business spending on equipment was raised to a 10.7% rate from 7.2%. While exports grew, the pace was less brisk than previously reported, leaving trade contributing only 0.78% percentage point to GDP growth instead of 1.32 percentage points.

Reuters


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