US third-quarter growth was revised higher; Corporate profits are rising strongly

WASHINGTON (Reuters) – The U.S. economy grew faster than initially thought in the third quarter as companies built more warehouses and piled up machinery equipment, but momentum appears to have waned since then as higher borrowing costs curb hiring and spending.

However, the fastest pace of growth in nearly two years, reported by the Commerce Department on Wednesday, likely overstated the health of the economy in the latest quarter. When measured in terms of income, economic activity increased at a moderate pace.

However, the mixed report was another reminder that the economy has continued to grow despite fears of a recession that have persisted since late 2022.

“No sign of dark skies for the economy in today’s report, but growth is slowing,” said Christopher Rupke, chief economist at FWDBONDS in New York. “There simply isn’t a lot of wind in the economy’s sails in the fourth quarter of this year.”

The Commerce Department’s Bureau of Economic Analysis, in its second estimate of third-quarter gross domestic product, said that gross domestic product rose at an annual rate of 5.2% in the fourth quarter, revised upward from the previously announced rate of 4.9%. This was the fastest pace of expansion since the fourth quarter of 2021.

Economists polled by Reuters had expected GDP growth to be revised upward to 5.0%. The economy grew at a pace of 2.1% in the April-June quarter and is expanding at a pace well above what Federal Reserve officials consider a non-inflationary growth rate of about 1.8%.

The upward revision to growth in the fourth quarter reflects upgrades in business investment in structures, mostly warehouses and healthcare facilities. Spending by state and local governments was also revised higher.

Residential investment has also increased, thanks to the construction of more single-family homes. Private investment in inventory was higher than previously estimated as wholesalers accumulated more machinery equipment. Investment in inventory added 1.40 percentage points to GDP growth.

But growth in consumer spending, which accounts for more than two-thirds of economic activity in the United States, fell to a still strong rate of 3.6%. The reduction from the previously estimated 4.0% pace of growth was due to reductions in expenditures on financial services and insurance as well as used light trucks, likely a result of shortages resulting from the recently ended United Auto Workers strike.

US stocks opened higher. The dollar stabilized against a basket of currencies. US Treasury bond prices rose.

Mixed details

When measured on the income side, the economy grew at a rate of 1.5% in the last quarter. Gross domestic income increased by 0.5% in the second quarter.

After-tax earnings without inventory valuation and adjustment for capital consumption, which is equivalent to S&P 500 earnings, rose $126.2 billion, or 4.3%. Profits rose 0.8% in the second quarter.

In principle, GDP and WII should be equal, but in practice they differ in that they are estimated using different and largely independent source data.

Average GDP and GDI, also referred to as gross domestic product and considered a better measure of economic activity, rose at a rate of 3.3% in the July-September period, accelerating from a 1.3% growth pace in the second quarter.

“Weak growth in the global growth index, which theoretically matches GDP, suggests that economic momentum may be weaker than the GDP data suggests,” said Gregory Daco, chief economist at EY Parthenon in New York.

Economic activity appears to have slowed significantly at the start of the fourth quarter, with retail sales falling for the first time in seven months in October. The job market is also declining. Job growth slowed last month and the unemployment rate rose to its highest level in nearly two years at 3.9%.

Slowing demand has increased optimism that the Fed may be done raising interest rates this cycle, with financial markets anticipating a rate cut in mid-2024.

Since March 2022, the US central bank has raised its benchmark overnight interest rate by 525 basis points to the current range of 5.25% to 5.50%.

The GDP report also confirmed that inflation is trending lower, with slight downward revisions to the measures the Fed is monitoring regarding monetary policy.

“The Fed may find itself in a good position,” said Jeffrey Roach, chief economist at LPL Financial in Charlotte, North Carolina. “Inflation is trending down, and consumers are still spending but at a slower pace. The Fed can end its rate hike campaign without doing too much damage to the economy.”

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