US economic growth was much stronger in the third quarter than first thought as consumers and businesses spent more than estimated, but Gulf Coast hurricanes sideswiped corporate profits, a government report shows today.
US gross domestic product, a measure of all goods and services produced within US borders, grew at a revised 4.3% annual rate in the July-to-September period, the fastest pace since the first three months of 2004, the Commerce Department said.
In its first snapshot a month ago, the department had put third-quarter growth at 3.8% and Wall Street economists had expected the rate to be revised up more modestly, to 4%. The sharp upward revision took growth a full point above the second-quarter's 3.3% rate.
Inflation was a bit lower than first reported, the report showed. The core consumer price index, which strips out volatile food and energy prices and is the Federal Reserve's favoured inflation measure, moved up just 1.2%, down from the 1.3% pace originally reported. That was the lowest rate of core inflation in more than two years.
Economists had expected the price index to be revised higher, and the surprise downward revision suggests Fed policy-makers have little to be concerned about on the inflation front.
Overall, the report reinforced the view that the US economy is on a solid footing, with tame inflation and strong consumer and business spending. Economists expect growth to cool in the fourth quarter and into 2006, however, as the housing market starts to fade and consumers pull back.
The report also offered the first look at corporate profits in the third quarter. Profits after tax fell 3.7%, the largest decline in four years, after a 5.3% rise in the second quarter. The Commerce Department said profits were reduced by $151.2 billion at an annual rate because of Hurricanes Katrina and Rita, as insurance companies made huge benefits payments and uninsured corporate property was lost.
The stronger-than-expected GDP growth in the third quarter was attributed to higher spending by both businesses and consumers. Consumer spending advanced at a robust 4.2% pace, above the 3.9% rate first reported. While growth in spending on big-ticket items was softer than initially thought, though at a still-booming 10.5% pace, purchases of nondurable goods grew 3.6%. This was stronger than the 2.6% pace first reported.
Spending on housing, too, was stronger than initially thought. Residential fixed investment grew at an 8.4% pace, up from the 4.8% growth first reported, after a 10.8% growth surge in the second quarter.
Business spending was also robust. Non-residential fixed investment rose at an 8.8% pace, above the initially estimated 6.2% growth, as spending on equipment and software rose at a 10.8% rate, just below the second-quarter's 10.9% increase.
While businesses reduced inventories in the third quarter, the drawdown was not as sharp as first thought. Stocks of unsold goods dropped at a $13.4 billion annual rate, slower than the $16.6 billion pace reported a month ago. That was still the largest drop since the fourth quarter of 2001 - after the September 11 attacks in New York and on the Pentagon.
