Economic growth in the United States accelerated in the third quarter as businesses rebuilt inventories but personal spending grew at the slowest rate in two years and combined with falling consumer sentiment this implies weaker growth ahead as the economy enters the holiday shopping season.
Gross domestic product expanded at a 2.8 percent annual rate, its best pace in a year, following a 2.5 percent expansion in the second quarter, according to the Commerce Department in Washington D.C. today. Economists had predicted 2.0 percent in the Bloomberg survey.
Personal consumption in the third quarter increased just 1.5 percent annually, the slowest rate in over two years. This equaled the lowest rate since the final quarter of 2009 and is down from 1.8 percent in the April -June period. About 70 percent of GDP depends on consumer spending.
The composition of the GDP growth was not as encouraging as the overall result. Inventories added 0.8 percent, consumer spending added 1.0 percent and exports 0.3 percent. Real final sales, that is GDP excluding inventories rose 2.0 percent.
Inventory growth will not continue unless consumers buy the goods and finished products already produced and give businesses reasons to manufacture more and buy raw materials.
The Conference Board index of consumer confidence sank to 71.2 in October from 79.7 the prior month, while the Michigan index dropped to 73.2 from 75.2 in September. More worrying than the declines in the overall indexes were the sharp drops in the expectations component.
In the Michigan survey expectations fell to 62.5 in October from 67.8 in September. It was the lowest reading in almost two years. In the Conference Board poll consumer expectations plunged to 71.5 in October from 84.7 the prior month, for the lowest gauge since March.
Even with the improvement in third quarter economic growth the U.S economy has only managed a 2.1 percent annual expansion so far this year. Growth is expected to decline in the fourth quarter, harmed, perhaps by the 16-day government shutdown and concerns about rising health care costs from Obamacare.
Goldman Sachs lowered their fourth quarter GDP estimate to 1.5 percent from 2.0 percent. If that prediction is accurate U.S economic growth for the year would be only 1.98 percent.
Tomorrow’s non-farm payrolls forecast is for 120,000 jobs to have been created in October. If correct, that would be the smallest number since July and would maintain the ebbing trend in job creation. The monthly average of payrolls has dropped from 209,000 in the final three months of last year, to 182,000 in the second quarter of this year to 143,000 in the third.
Whatever the other brighter U.S. statistics, the GDP and payrolls numbers are not results that will encourage the Federal Reserve to reduce its $85 billion a month in securities purchases.
Despite almost five years of zero-percent interest rates and nearly $3 trillion dollars of acquired assets the Fed looks barely closer to its goal of a self-sustaining U.S recovery than when it’s stated its economic experiment.
Ben Bernanke’s signature program, quantitative easing, will soon belong to Janet Yellen.
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