US economy expands less than estimated

The economy in the US grew less than previously estimated in the third quarter, reflecting a smaller gain in consumer spending that is giving way to a pickup in demand this quarter as the job market improves.

Gross domestic product climbed at a 1.8 per cent annual rate from July through September, down from the two per cent estimated last month, revised Commerce Department figures showed on Thursday in Washington. The median forecast of 82 economists surveyed by Bloomberg News projected it would hold at two per cent. Household purchases increased at a 1.7 per cent rate, down from 2.3 per cent.

The world’s largest economy has picked up this quarter as manufacturers rebuild depleted inventories, Americans take advantage of holiday discounts and pent up demand boosted sales of new cars. Nonetheless, the threat of government cutbacks and fallout from financial turmoil in Europe remain obstacles for expansion heading into 2012.

“The fourth quarter should be the strongest of all this year,” said Stuart Hoffman, chief economist at PNC Financial Services Group Inc., who correctly forecast the revision. “We are avoiding a recession and the persistent calls for a double dip are wrong.”

Fewer claims
The number of applications for unemployment benefits unexpectedly dropped last week to the lowest since April 2008, a sign that the labor market is strengthening heading into 2012. Jobless claims fell by 4,000 to 364,000 in the week ended Dec. 17. The median forecast of 45 economists surveyed by Bloomberg News projected an increase to 380,000.

Stock-index futures extended earlier gains following the unexpected drop in jobless claims. The contract on the Standard & Poor’s 500 Index maturing in March rose 0.6 per cent to 1,243.5 at 8.46 am in New York.

GDP forecasts in the Bloomberg survey ranged from 1.5 percent to 2.8 percent. The government’s GDP estimate is the third and final one for the quarter. The economy grew at a 1.3 percent rate in the prior three months.

“Growth is modest, but at this point modest feels pretty good,” Chris Low, chief economist at FTN Financial in New York, said before the report. “Growth has been stronger each quarter.”

Consumer spending
The smaller gain in consumer spending, about 70 percent of the economy, reflected a drop in outlays on health care that was previously reported as an increase. Spending on health services reduced GDP by 0.1 percentage point in the third quarter, compared with the 0.6 contribution initially estimated.

The revision “won’t change peoples’ view that consumer spending on discretionary holiday items is actually doing very well,” said Hoffman.

“Everything we have seen so far in the fourth quarter suggests that consumer spending will be up at a faster clip than the third quarter,” he said. “Holiday sales are good, the unemployment claims are down.”

Households are also willing to buy big-ticket items. Sales of car and light trucks advanced in November at a 13.6 million seasonally adjusted annualized rate, the best month since August 2009, according to researcher Autodata Corp.

The unemployment rate fell to a more than three-year-low of 8.6 percent in November, Labor Department figures showed this month. Spending during the Thanksgiving weekend jumped 9.1 per cent per customer from a year earlier to $398.62, according to the National Retail Federation.

Sales totaled a record $52.4 billion.

Inventories Lean
Fewer stockpiles also put producers on track to increase output. Inventories subtracted 1.4 percentage points from third quarter growth. Excluding inventories, gross domestic product advanced at a 3.2 percent annual rate.

Stockpiling could boost fourth quarter growth by up to 1 percentage point, Joe LaVorgna, chief U.S. economist at Deutsche Bank Securities Inc, estimated in a Dec. 14 research note. The overall economy will expand 3 percent in the final three months of 2011, LaVorgna forecasts.

An improving economic outlook put Federal Reserve policy makers led by Chairman Ben S. Bernanke on hold last week from taking new actions to lower borrowing costs. The economy “has been expanding moderately, notwithstanding some apparent slowing in global growth,” the Federal Open Market Committee said in a Dec. 13 statement.

Corporate Profits
Corporate profits last quarter also rose less than previously estimated. Earnings grew 1.7 percent and were up 7.5 percent from the same time last year. That was revised down from 2.1 percent and 7.9 percent.

There are still hurdles for growth. The savings rate last quarter dropped to 3.9 percent from 4.8 percent in the prior three months. After-tax incomes adjusted for inflation decreased at a 1.9 percent annual rate, the biggest drop since the third quarter of 2009.

“I have seen consumption grow at a faster rate than real income for pretty much a year, and that worries me,” said Paul Dales, senior U.S. economist at Capital Economics Ltd. in London. “It just can’t be sustained. Consumption growth will have to slow perhaps quite sharply next year.”

Tightening fiscal policy may also constrain consumers next year. The U.S. House of Representatives rejected this week the extension of both an expiring 2 percentage-point payroll tax cut and benefits for the long-term unemployed. Failure to prolong those measures will curb GDP growth next year by about 0.6 percentage point, economists at IHS Global Insight estimate.

A recession in Europe triggered by the region’s sovereign debt crisis could also set the U.S. economy back.

“We’re planning for slow growth in Europe and North America,” Louis Chenevert, chief executive officer of United Technologies Corp. (UTX) said during a Dec. 15 presentation. Citing IHS estimates, the Hartford, Connecticut-based maker of Pratt & Whitney jet engines projected worldwide expansion of 2.9 percent. “Despite what’s been advertised here and there, strong holiday sales, U.S. consumer sentiment as well as housing, unemployment remain very weak, and there are more challenges in Europe.”