U.S. Economy Underperforms

Third-quarter drop in inventories points to a bounce in growth in fourth quarter.

The economy in the U.S. expanded less than previously estimated in the third quarter, reflecting a drop in inventories that points to a pickup in growth as 2011 comes to a close.

Gross domestic product climbed at a 2 percent annual rate from July through September, less than projected and down from a 2.5 percent prior estimate, revised Commerce Department figures showed today in Washington. The median forecast of 81 economists surveyed by Bloomberg News called for no revision. Excluding stockpiles, so-called final sales climbed 3.6 percent, the most since last year’s fourth quarter.

Gains in retail sales, manufacturing and housing this quarter, combined with lean inventories, raise the odds the world’s largest economy will pick up. At the same time, unemployment and stagnant wages mean consumer spending has been fueled by reductions in savings that cast doubt on whether increases will be sustained into 2012, just as the risks from government cutbacks and the European debt crisis intensify.

“We should see a little bit of a bounce in the fourth quarter, then growth will probably grind back down,” said Nariman Behravesh, chief economist at IHS in Lexington, Massachusetts, who correctly forecast the growth figures and expects GDP to expand by 2.5 percent to 3 percent this quarter.

Stock-index futures fell after the report. The contract on the Standard & Poor’s 500 Index maturing next month dropped 0.3 percent to 1,187.1 at 8:58 a.m. in New York.

Growth forecasts in the Bloomberg survey ranged from 2 percent to 2.9 percent. The world’s largest economy grew at a 1.3 percent rate in the prior three months.

The report also showed corporate profits climbed at a slower pace last quarter, and the gain in wages and salaries for the period from April through June was cut by more than half, to $38.9 billion from $78.7 billion.

Consumer spending, about 70 percent of the economy, grew at a 2.3 percent annual rate, little changed from the 2.4 percent initial estimate. Purchases added 1.6 percentage points to growth.

“There’s certainly a lot of crummy data out there, whether it’s wages or income or net worth, the unemployment rate doesn’t seem to be moving, but the consumer has held up surprisingly well,” Ron Sargent, chief executive officer of Staples Inc., the world’s largest office-supply retailer, said during a Nov. 15 teleconference.

The savings rate last quarter dropped to 3.8 percent, the lowest since the last three months of 2007. That figure was initially calculated as 4.1 percent. After-tax incomes adjusted for inflation decreased at a 2.1 percent annual rate, the biggest drop since the third quarter of 2009, and revisions showed another decrease in the previous three months rather than the previously calculated gain.

“The savings rate fell very sharply, and that may be an attempt to sustain personal spending, and that’s not doable again,” said John Silvia, chief economist at Wells Fargo Securities LLC in Charlotte, North Carolina. “Over time they’re going to have to come to grips with the reality that they just don’t have whatever it takes to sustain their spending.”

Today’s report offered a first look at corporate profits. Earnings climbed 2.1 percent from the prior quarter, after rising 3.3 percent in the prior period. They increased 7.9 percent from the same time last year.

Gross domestic income was also reported today for the first time. The measure, which shows the money earned by the people, businesses and government agencies whose purchases go into calculating growth, rose at a 0.4 percent annual rate from July through September after adjusting for inflation. According to Federal Reserve research, GDI may be a better gauge of the economy.

Inventories were a greater drag on the economy last quarter than first estimated. They were cut at an $8.5 billion annual rate, subtracting 1.6 percentage points from growth, compared with a 1.1 percent previous estimate. It was the first time stockpiles were trimmed since the last three months of 2009.

Fewer inventories put producers on track to ramp up output heading into the holiday season. Restocking will boost growth by 0.8 percentage points in the fourth quarter, according to economists at JPMorgan Chase & Co in New York.

They now see GDP rising 3 percent in the final quarter, up from a previous prediction of 2.5 percent. They project a slowdown to 0.5 percent in the first three months of 2012.

Yesterday, lawmakers on a special debt-reduction committee announced they failed to reach agreement and dissolve congressional gridlock. Stocks tumbled, extending last week’s declines, amid concern the government will be forced to submit to $1.2 trillion in automatic spending cuts. The Standard & Poor’s 500 Index lost 1.9 percent, to close at 1,192.98 in New York.

The near-term issue is not the automatic budget cuts that will take effect starting 2013, rather it’s the expiration at the end of this year of the temporary reductions in payrolls taxes and the extension of jobless benefits, according to Michael Feroli, chief U.S. economist at JPMorgan.

“While the fate of those measures are not directly tied to the supercommittee, this week’s failure to come to an agreement probably reduces the likelihood some that those programs get extended,” Feroli said in a note to clients yesterday. “Thus we can expect a noticeable drag from fiscal consolidation early next year.”

The European Central Bank stepped up bond purchases last week as the debt crisis worsened, spending Italian and Spanish bond yields soaring. Growth in Germany, Europe’s largest economy, may slow to a near standstill next year as the region’s debt crisis saps demand for exports, the Bundesbank also said yesterday.

Federal Reserve officials are divided over whether additional steps are needed to lower borrowing costs and boost job creation. Minutes of their Nov. 1-2 meeting, to be released later today, may shed more light on their discussions.





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