Q3 US GDP Growth 3.6% surprises economists

US GDP growth of 3.6% (annualized) surprised experts.

The figure was revised up from a preliminary estimate of 2.8%. Second quarter growth had been 2.5%.Q3 2013 had the fastest growth rate since Q1 2012.

According to the Bureau of Economic Analysis, part of the US Commerce Department, the upward revision was mainly due to businesses restocking inventories.Inventory restocking was revised up from $86.0 billion to $116.5 billion, over double the Q2 pace.

The larger-than-previously-thought restocking of inventories contributed 1.68 percentage points to total growth. In view of this it is unlikely the pace of growth is sustainable.

Consumer spending, which is the main driver of the US economy, declined in the third quarter (annualized 1.4% growth) compared to the second (annualized 1.8% growth).

Economists were overall encouraged by data regarding the US economy. However, after removing temporary factors such as inventories, US GDP growth is still stuck at approximately 2% per year.

Most analysts agree that the US Federal Reserve is likely to start scaling back its stimulus program of injecting $85 billion into the financial system every month.

Reuters quotes Dennis Lockhart, President of the Atlanta Federal Reserve (he does not have a vote on the policymaking committee in 2013/2014), who said “I am not prepared to interpret the revised third quarter number as an indication that the economy is on a much stronger track – I think we’re still on that relatively moderate growth track.”

Feds watching inflation carefully

Other data the Federal Reserve will be looking at carefully are regarding inflation. The third quarter annualized core price index for personal consumption expenditure was revised up from 1.4% to 1.5%, and the overall price index from 1.9% to 2%.

In comparison to 2012, inflation is still very low. The core index has increased by a mere 1.2% and the overall index by 1.1%. The Federal Reserve’s target is a 2% increase.

In an interview with Bloomberg, Lewis Alexander, chief economist at Nomura Holdings Inc. in New York, said “When you look at the relative optimism you’ve seen in the business surveys, the most logical explanation for the inventory build is a more positive outlook. The big missing ingredient is businesses being sufficiently confident to actually boost hiring and do capital spending.”

Fourth quarter US GDP growth is expected to be much lower than in Q3 and Q2. The 16-day partial government shutdown in October plus likely weak inventory accumulation after strong restocking in Q3 will weigh on Q4 GDP growth.

Most experts calculate that the partial government shutdown will have cost GDP growth as much as half a percentage point.