US economy grows strongly but weakness looms

The US economy grew faster than initially thought in the third quarter, but the momentum is unlikely to be sustained as the nation braces for deep cuts in government spending and tax increases early next year.

Gross domestic product expanded at a 2.7 per cent annual rate, the Commerce Department said on Thursday, as faster inventory accumulation and export growth offset weak consumer spending and the first drop in business investment in more than a year.

While the growth pace was much quicker than the 2.0 per cent rate the government estimated last month and the best since the fourth quarter of 2011, it was hardly a sign of strength in the economy given the boost from restocking and weaker consumer spending.

That will likely be lost in the fourth quarter and inventories may be a drag on growth, which is already being weighed down by fears of austerity, known as the fiscal cliff.

Lawmakers and the Obama administration are engaged in talks to avert the fiscal cliff, which could suck $US600 billion from the economy and fuel a fresh recession.

Economists polled by Reuters had expected GDP growth to be raised to a 2.8 per cent pace. Business inventories added 0.77 per centage point to third-quarter GDP growth. They were previously estimated to have subtracted 0.12 per centage point.


Excluding inventories, GDP rose at a revised 1.9 per cent rate, underscoring sluggish demand. Final sales of goods and services produced in the United States had been previously estimated to have increased at a 2.1 per cent pace.

Output during the July-September quarter was also revised up to show a smaller trade deficit as export growth outpaced the rise in imports. But the trend in exports is unlikely to be sustained given slowing global demand, especially in China and debt troubled Europe.

Trade contributed 0.14 per centage point to GDP growth instead of subtracting 0.18 per centage point, as previously reported.

Away from exports, details of the report were rather weak. Consumer spending, which accounts for about 70 per cent of US economic activity, was lowered to a 1.4 per cent growth rate - the slowest since the second quarter of 2011, from the 2 per cent gain previously reported.

Consumer spending increased at a 1.5 per cent rate in the second-quarter.

Business spending was revised to show much deeper cutbacks, which have been blamed on the fears a tightening in fiscal policy next year. Business investment fell at a revised 2.2 per cent rate instead of 1.3 per cent decline. That was the first drop since the first quarter of 2011.

Part of the drag in business investment, which had been a source of strength for the economy, came from equipment and software, where spending was the weakest since the second quarter of 2009.

The report also showed that after-tax corporate profits rose at a 3.3 per cent rate in the third quarter after gaining 2.2 per cent in the second quarter.

Spending on nonresidential structures contracted after five straight quarters of growth. Government investment was revised to a 3.5 per cent growth rate from 3.7 per cent as defense, and state and local government spending estimates were pared.

Growth in home building was trimmed to a 14.2 per cent rate from 14.4 per cent. Residential construction is benefiting from the Federal Reserve's ultra accommodative monetary policy stance, which has driven mortgage rates to record lows.