US third-quarter growth revised higher; Corporate profits will rise strongly

WASHINGTON, Nov 29 (Reuters) – The U.S. economy grew faster than initially thought in the third quarter as businesses piled on more warehouses and machinery, but the pace appeared to have slowed as higher borrowing costs curbed hiring and spending.

The fastest growth pace in nearly two years was reported by the Commerce Department on Wednesday, however, and may have overstated the health of the economy in the last quarter. When measured by income, economic activity increased at a moderate pace.

Still, the mixed report was another reminder that despite fears of a lingering recession from late 2022, the economy continues to grow.

“Today’s report shows no sign of a gloomy sky for the economy, but growth is cooling,” said Christopher Rupkey, chief economist at FWDBONDS in New York. “There is not much wind in the economy’s sails in the final quarter of the year.”

Gross domestic product grew at an annualized rate of 5.2% last quarter, revised up from a previously reported 4.9% pace, the Commerce Department’s Bureau of Economic Analysis said in its second estimate of third-quarter gross domestic product. This is the fastest expansion since the fourth quarter of 2021.

Economists polled by Reuters had expected GDP growth to be revised up to a 5.0% rate. The economy grew at a 2.1% pace in the April-June quarter and is expanding faster than Federal Reserve officials expect a non-inflationary growth rate of 1.8%.

The upward revision to growth last quarter reflected improvements in business investment in infrastructure, mostly warehouses and healthcare facilities. Expenditure by state and local governments was also heavily revised.

Residential investment was also boosted as more single-family homes were built. Private inventory investment was higher than previously estimated as wholesalers stockpiled more machinery. Investment in goods added 1.40 percentage points to GDP growth.

But growth in consumer spending, which accounts for more than two-thirds of US economic activity, slowed to a more robust 3.6% rate. The downgrade from a previously estimated 4.0% growth pace was due to lower spending on financial services and insurance and used light trucks, likely a result of shortages caused by the recently concluded United Auto Workers strike.

US stocks opened higher. The dollar was steady against a basket of currencies. US Treasury prices rose.

Mixed details

The economy grew by 1.5% in the last quarter. Gross domestic income (GDI) grew at a rate of 0.5% in the second quarter.

After-tax profit without adjustments for inventory valuation and capital consumption, which is relative to S&P 500 profit, increased by $126.2 billion, or 4.3%. Profit rose 0.8% in the second quarter.

In principle, GDP and GDI should be equal, but in practice they differ because they are estimated using different and often independent source data.

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

“The growth in the GTI, which is theoretically identical to GDP, has slowed, suggesting that economic momentum will be softer than the GDP data suggests,” said Gregory Tago, chief economist at EY-Parthenon in New York.

Economic activity appears to have cooled significantly at the start of the fourth quarter, with retail sales falling for the first time in seven months in October. The labor market is also weakening. Job growth slowed last month and the unemployment rate rose to a nearly two-year high of 3.9%.

With financial markets also expecting a rate cut in mid-2024, the need to slow has increased on hopes that the Federal Reserve could raise interest rates this cycle.

From March 2022, the US Federal Reserve has raised its overnight interest rate by 525 basis points from the current 5.25% to 5.50%.

The GDP report confirmed that inflation remained low, with slight downward revisions in measures observed by the central bank for monetary policy.

“The feds may find themselves in a sweet spot,” said Jeffrey Roche, chief economist at LPL Financial in Charlotte, North Carolina. “Inflation is low, consumers are still spending, but at a slower pace. The Fed can end its rate hike campaign without much pain in the economy.”

Our Standards: Thomson Reuters Trust Principles.