Flash estimate sees US GDP stronger than expected

US GDP increased by 2.8 per cent annually in the third quarter, according to a flash estimate, after expectations of a 2.0 per cent rise and following second quarter growth of 2.5 per cent.

The increase, says the Bureau of Economic Analysis, primarily reflects positive contributions from personal consumption expenditures, private inventory investment, exports, residential fixed investment, nonresidential fixed investment, and state and local government spending that were partly offset by a negative contribution from federal government spending. Imports, which are a subtraction in the calculation of GDP, increased.

Paul Ashworth, chief US economist at Capital Economics:

The pick-up in third-quarter GDP growth was largely due to a bigger than expected boost from inventory accumulation, which added 0.8% pts to the headline figure. Stripping out inventories and external trade, the growth rate of final sales to domestic purchasers, which is a better gauge of underlying economic strength, slowed to 1.7% in the third quarter, from 2.1% in the second. Consumption growth slowed to 1.5%, from 1.8%, while business investment in increased by only 1.4%, down from a 4.7% gain in the previous quarter. Admittedly, residential investment increased by a strong 14.6%, but the latest monthly data on home sales and housing starts suggests that the housing recovery will provide a much smaller boost to overall GDP growth over the next couple of quarters.

The good news is that, despite the modest ongoing impact of the sequestration cuts to Federal spending, the public sector is no longer dragging the economy down. Total government consumption increased by 0.2%, driven by a 1.5% rebound in State and local government spending. The latter reflects the rebound in tax revenues, which is allowing those State and local governments, who are forced to run balanced budgets, to rehire some of the workers they let go in the aftermath of the recession.