The Bureau of Economic Analysis reported a surge in inventory replenishments in the third quarter, producing another stronger-than-expected growth rate in real GDP. The U.S. economy grew 3.6 percent at the annual rate in the third quarter, up from its previous estimate of 2.8 percent. This was the fastest pace since the first quarter of 2012.
The earlier estimate said that the change in private inventories contributed 0.81 percentage points to real GDP growth. With this revision, that contribution more than doubled to 1.68 percentage points. In other words, nearly 47 percent of the growth in the economy in the third quarter can be attributed to the restocking of inventories. This suggests that fourth quarter real GDP growth will not benefit as much from inventories, probably resulting in output growth of just over two percent for the current quarter.
The other data in the GDP report did not change much from the previous estimate, and if anything, the size of the individual contributions eased a bit. The bulk of the remaining gains in output stemmed from consumer spending (0.93 percentage points) and private fixed investment (0.81 percentage points). Consumer goods spending rose an annualized 4.1 percent for the quarter, with larger increases for durable goods purchases. On the investment side, the bright spots were for higher spending on residential and nonresidential structures and industrial equipment.
Net exports and government spending both had very small positive contributions to real GDP for the quarter (0.07 and 0.09 percentage points, respectively). Both of these were off slightly from the earlier estimate. Behind the positive numbers were a couple key trends. Goods exports rose 5.4 percent at the annual rate, outpacing the 2.7 percent pace for goods imports. While the federal government remained a drag on growth, these were offset by improvements at the state and local level.
In summary, the U.S. economy grew at its fastest pace in six quarters. After stalling at the end of 2012, real GDP has accelerated with each successive quarter in 2013. Yet, much of the increase in output in the third quarter was attributed to inventory replenishment. With stockpiles full, businesses will not need to restock as much in the fourth quarter. This suggests that the economy will grow more slowly in the current quarter, and for the year as a whole, I predict real GDP growth of around 2.3 percent.
Moving into 2014, the prospects for growth are more upbeat, and there is a possibility of annual growth of 3.0 percent or more. If this materializes, it would be the first year since 2005 that that would happen. At the same time, there continue to be downside risks to growth next year, much of that stemming from government. Policymakers would be wise to reduce uncertainties in the marketplace and consider measures that will keep manufacturing the overall economy on a growth trajectory. To do otherwise, the result would be to dampen demand and increase the cautiousness of the business sector.
Chad Moutray is the chief economist, National Association of Manufacturers.
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