Thursday, November 29, 2012

U.S. Economy Grew at 2.7% in Third Quarter

Real GDP growth in the US improved in the third quarter to an annual rate of 2.7%, up from 1.3% in the second quarter, according to the BEA’s second estimate. This report revised growth up from 2.0% reported in the first estimate. The improvement from the second quarter was driven primarily by increased inventories as well as the largest positive contribution to growth from government spending in three years.

Inventory accumulation strongly helped third quarter growth, adding 0.8%, much better than the 0.5% drag in the second quarter. Government spending boosted growth as well, contributing 0.7%, the strongest level in three years. Fixed investment dropped off in the third quarter, contributing only 0.1% to GDP growth, down from the 0.6% contribution seen in the second quarter.

The BEA’s second estimate of third quarter GDP growth is notably higher than its initial estimate of 2.0%. The improvement is due primarily to revisions to inventory accumulation and exports that outweighed negative revisions to consumer spending and fixed investment. Inventories, initially reported as a 0.5% drag for the third quarter, improved to providing a 0.8% boost. Net exports also received a strong revision, recording a contribution to GDP growth rather than a drag.

Although the BEA’s revision presents much stronger growth than its initial estimate, the details of the report are not positive for growth moving forward. The strength of third quarter growth rests heavily on inventory and government spending. Inventory accumulation is a negative sign for future growth as less will need to be produced to meet future demand. In addition, the strong government spending is unlikely to be sustainable as the government cuts spending and begins addressing the deficit.

Read the BEA release.

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