WASHINGTON -- U.S. economic growth in the third quarter was revised sharply higher, to a healthy annual rate of 4.1%, thanks to stronger consumer spending and nonresidential investment than previously thought.
Commerce Department officials had previously estimated that the nation’s gross domestic product, or total value of goods and services produced, expanded 3.6% in the July-to-September period. The revised data released Friday indicate that last quarter’s GDP growth rate was the fastest since the end of 2011, and importantly, that there was broader economic momentum heading into the final months of the year than believed.
The report shows that the GDP improvement in the third quarter, from a rate of 2.5% in the second quarter, wasn’t just because of a big restocking of goods. A sizable buildup in inventory in one quarter usually leads to a drop in the next, and as such, isn’t seen as a good indicator of underlying growth.
Rather, consumer spending accounts for about 70% of American economic activity. That was previously estimated as having slowed from the second quarter to a sluggish 1.4% increase. But the revision brought personal spending growth in the third quarter up to 2%, meaning that it actually accelerated slightly from the prior quarter and contributed almost as much (1.4 percentage points) to the overall GDP growth as inventory buildup (1.7 percentage points).
Home building and nonresidential investments added to the third quarter’s GDP growth, and net exports and increased spending by state and local governments also contributed a little to the overall expansion.
Corporate profits rose 1.9% in the third quarter, down from 3.3% in the second quarter.
GDP growth in the current quarter is looking weaker, in large part because of an expected drag in inventories. But with hiring having picked up recently, a new two-year federal budget in place and an improved global outlook, analysts have steadily raised their GDP estimates for the near term.
The latest forecast from Macroeconomic Advisers, as of Thursday, showed GDP advancing at a 2.2% annual rate in the fourth quarter, up from its projection of 1.7% just a week earlier.
Many analysts expect the economy to grow at a healthier pace in 2014 than this year. In its forecast this week, most Federal Reserve policymakers projected GDP growth of 2.8% to 3.2% next year, up from 2.2% to 2.3% expected for this year.
“The main missing ingredient for stronger growth is confidence,” said Scott Hoyt, an economist at Moody’s Analytics, in commenting on Friday’s GDP report. “But sentiment has improved with the budget deal and apparent reduction in brinkmanship in Washington,” he said. “Investors are especially upbeat, as stock prices continue to hit record highs. With the reduction in fiscal drag and release of pent-up demand, 2014 could be a breakout year for the economy.”