GDP Data Revised Downward

The U.S. economy expanded in the third quarter at the slowest pace in four years, depressing corporate profits and suggesting a sharper slowdown than expected, revised government figures showed Wednesday.

Gross domestic product grew at a 2.4% annual pace in the third quarter, revised down from a previously reported 2.7% increase, as businesses built up smaller inventories, invested less in computers and exported fewer goods, the Commerce Department said.

Third-quarter growth was less than half the 5.6% rate in the second quarter. Federal Reserve policymakers may regard additional evidence of slower growth as more of a threat to the record expansion than rising prices. The Fed’s Open Market Committee, which sets interest rate policy, meets Dec. 19.

“If growth continues to deteriorate, the Fed will find the risks weighted more heavily toward an economic slowdown rather than a flare-up of inflationary pressures,” said Richard Yamarone, senior economist at Argus Research Corp. in New York.

Although the third-quarter growth rate was the slowest since a 2% pace in the third quarter of 1996, Fed officials probably won’t cut the overnight bank lending rate from its nine-year high of 6.5% any time soon, even if they drop their regular post-meeting warning that accelerating inflation is a greater risk to the economy than slumping growth, analysts said.

“The economy has slowed but not nearly enough for the Fed to ease,” said Joel Naroff, president of Naroff Economic Advisors in Holland, Pa.

But there remained few signs of inflation. The GDP price deflator, a broad measure of inflation tied to the report, rose at a 1.9% annual rate in the third quarter, previously estimated as a 2% increase. The rise in the deflator was the smallest since a 1.3% rate of increase in the fourth quarter of 1999.

Meanwhile, third-quarter after-tax corporate profits, reported by the government for the first time Wednesday, rose at a 0.6% annual rate, after rising at a 2.5% pace in the second quarter. That was the weakest showing since profits declined at a 1.6% rate in the fourth quarter of 1998, Commerce Department officials said.

The third-quarter GDP revision in part reflected slower inventory growth. Unsold goods piled up in warehouses and stores at a slower pace. Business inventories rose $73.5 billion at an annual rate in the third quarter, initially reported as an increase of $79.9 billion.

Business investment in equipment and software grew at a 5.8% rate, slower than the 8.5% first estimated. “It is much clearer now that the economy is mired in an investment-driven slowdown,” Yamarone said.

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Gross Domestic Product

Annualized rate of increase, by quarter:

Third quarter: 2.4%

Source: Commerce Department