US economy on firmer footing

Economists had expected third-quarter GDP growth would be unrevised at a 3.6 percent rate.

US Federal Reserve Vice Chair Janet Yellen. Picture: Peter Parks/AFP

WASHINGTON - The US economy grew at its fastest pace in almost two years in the third quarter, the government said on Friday, as it revised its estimates of business and consumer spending higher.

The broad revisions hinted at some underlying strength, which could help the economy better absorb the blow from an anticipated cutback in inventory accumulation this quarter.

The Federal Reserve on Wednesday gave the economy a vote of confidence, announcing it would reduce its $85 billion monthly bond purchases by $10 billion starting in January.

Gross domestic product grew at a 4.1 percent annual rate instead of the 3.6 percent pace reported earlier this month, the Commerce Department said in its third estimate.

That was the quickest pace since the fourth quarter of 2011 and an acceleration from the April-June quarter's a 2.5 percent.

Economists had expected third-quarter GDP growth would be unrevised at a 3.6 percent rate.

"This is a fairly solid report, said Ryan Sweet, senior economist at Moody's Analytics in West Chester, Pennsylvania, adding that the mix of factors in the report was more positive than expected.

"At first it was an inventory story. Now with this mix, it is favourable for the fourth quarter and into early 2014. The pullback in inventories seems less threatening and will be fairly gradual."

US stock index futures rose after the data. The dollar hit a five-year high against the yen, while US Treasury debt prices were little changed.

Business spending increased at a 4.8 percent rate instead of the 3.5 percent pace reported early this month. That reflected stronger growth in intellectual property products such as software, research and development, and entertainment.

There were also upward revisions to consumption. Consumer spending, which accounts for more than two-thirds of US economic activity, was raised 0.6 percentage point to a 2.0 percent rate. The revisions reflected higher spending on both goods and services than previously estimated.

Revisions to spending on gasoline and other energy goods accounted for part of the upward revision to spending on goods, while spending on healthcare and other services also was higher than previously estimated.

Consumer spending grew at a 1.8 percent rate in the second quarter.

Business spending on equipment was revised up to a 0.2 percent pace. It had previously been reported as being flat.

That left domestic demand rising at a 2.3 percent rate, instead of the 1.8 percent pace the government reported earlier this month.

Export growth was also raised up by two tenths of a percentage point to a 3.9 percent pace.

Spending on residential construction was lowered by 2.7 percentage points to a 10.3 percent rate in the third quarter.

A large build-up of stocks still accounted for much of the increase in GDP growth in the July-September quarter. That has left economists anticipating a slowdown in the pace of inventory accumulation, which would hurt fourth-quarter growth.

Businesses accumulated $115.7 billion worth of inventories. That compared to prior estimates of $116.5 billion.

So far there is little sign that businesses are pulling back, with stocks at retailers, auto dealerships and wholesalers increasing solidly in October.

Some economists say the inventory drag on GDP could be delayed until the first quarter of 2014, while others believe the third-quarter stock pile-up was probably planned.

An inventory drag in the first three months of 2014 is likely to be offset by some loosening of fiscal policy.