GDP Grew Faster Than Expected in Third Quarter

Economic growth was surprisingly fast last quarter, but it may not be sustainable.

Chassis assembly line supervisor Jeff Caldwell checks a vehicle at the Chrysler Jefferson North Assembly plant in Detroit on May 8, 2013.
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The U.S. economy grew at an annual rate of 2.8 percent in the third quarter, the Commerce Department reported Thursday. The figure comes in well above consensus estimates, which had been around 2.0 percent, according to Bloomberg, and also is an acceleration from the second-quarter GDP growth rate of 2.5 percent.

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The latest reading of economic growth shows the economy had strengthened in the months leading up to the government shutdown and debt ceiling standoff. As gridlock in Washington likely shaved several tenths of a percentage point off of economic growth in the fourth quarter, this stronger-than-expected GDP growth figure may mean the economy will prove more resilient than expected in responding to those negative shocks.

"Certainly it's a better number than we were expecting," says Gus Faucher, senior economist at PNC Financial Services. "It indicates the economy had some momentum going into the government shutdown and debt limit debate," which he estimates will have cut 0.3 percentage points from fourth-quarter GDP growth.

The improved figures show the U.S. economy should be able to withstand the effects of the shutdown and standoff and be set up for faster growth again in 2014, Faucher adds.

Greater business inventory investment, a boost in state and local government spending, and a slowdown in imports all helped to accelerate GDP growth last quarter, despite slowdowns in exports, business investment in equipment and software, and consumer spending.

Though the improved growth may be an encouraging sign for the economy, the report also raises questions about whether that strength can be sustained through the fourth quarter.

"The consumer's still not spending a lot of money," says Joel Naroff, president and chief economist at Naroff Economic Advisors, a Pennsylvania-based consulting firm, and the areas where consumers are spending money – durable goods and motor vehicles – are also showing signs of slowing.

"We're getting to the point where we're closing in on more normal levels of vehicle sales, so the chance that over the next year we'll see the same increase as we did over the past year are slim to none," Naroff says.

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In addition, the boost from inventory investment businesses made in the third quarter may hurt GDP growth in the future.

Faucher points out that 0.8 percentage points of GDP growth came from businesses investing in their inventories.

"What that means is that inventories are likely to be a negative for growth in the fourth quarter," Faucher says. In other words, businesses that have full warehouses are not likely to restock at the same levels in the near future.

In addition, the GDP report will still go through two more scheduled revisions, meaning that 2.8 percent could easily turn into a much lower number in coming months.

Because it constitutes an upside surprise, the latest GDP report is a positive sign, Naroff says, but he adds that it's also wise to not read it as unequivocally positive.

"It's good to see; I'll take it, but I'm not sure the fundamentals of really good consumer and business spending are there, and that's what worries me about the report," he says.

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