The U.S. Economy grew faster than initially thought in the third quarter, notching its best performance in two years, buoyed by strong consumer spending and a surge in soybean exports.
Gross domestic product increased at a 3.2% annual rate instead of the previously reported 2.9% pace, the Commerce Department said in its second GDP estimate on Tuesday. Growth was the strongest since the third quarter of 2014 and followed the second quarter’s anemic 1.4% pace.
Growth was also lifted by upward revisions to business investment in structures and home building, underscoring the economy’s solid fundamentals that further bolster the case for the Federal Reserve to raise interest rates next month.
Data ranging from housing to retail sales and manufacturing suggest the economy retained its momentum early in the fourth quarter even as exports appear to be faltering against the backdrop of renewed dollar strength and a fading soybean boost.
Economists polled by Reuters had expected that third-quarter GDP growth would be revised up to a 3.0% rate.
When measured from the income side, the economy grew at a 5.2% clip amid a rebound in corporate profits and rising household incomes. That was the fastest pace of increase in gross domestic income since the second quarter of 2014 and followed a 0.7% rate of increase in the second quarter.
The average of GDP and GDI, which some economists consider to be a more accurate measure of current economic growth and a better predictor of future output, increased at a 4.2% rate in the third quarter, the fastest pace in two years. That followed a 1.1% rate of increase in the second quarter.
Favorable Growth Profile
The third-quarter revision also showed a much more favorable growth profile for the economy. The boost from inventories was not as big as previously estimated, which suggests that businesses are not sitting on piles of unwanted goods.
This means they will have more scope to place new orders, which augurs well for economic growth in the coming quarters. The sharp acceleration in GDP in the last quarter should quash any lingering fears that the economy was at risk of stalling after growth averaged just 1.1% in the first half.
That together with a labor market that is near full employment and steadily rising inflation could leave the Fed comfortable to hike interest rates at its Dec. 13-14 policy meeting. The U.S. Central bank raised its overnight benchmark interest rate in December for the first time in nearly a decade.
The Commerce Department said consumer spending, which accounts for more than two-thirds of U.S. Economic activity, increased at a 2.8% rate in the third quarter and not the 2.1% pace reported last month. That was still a slowdown from the second quarter’s robust 4.3% pace.
Spending on nonresidential structures, which include oil and gas wells, increased at a 10.1% rate, the fastest pace since the first quarter of 2014. Nonresidential outlays were previously reported to have increased at a 5.4 percent pace.
Business spending on equipment, however, fell at steeper 4.8% rate, instead of the previously reported 2.7 percent pace of contraction. That marked four straight quarters of decline in spending on equipment.
With after tax corporate profits rising at a 7.6% pace last quarter there is scope for business investment to rebound. Corporate profits declined at a 1.9 percent rate in the second quarter.
The export growth estimate was little changed at a 10.1% rate, the fastest pace since the fourth quarter of 2013. The spike in exports largely reflected a surge in soybean exports after a poor soy harvest in Argentina and Brazil.
Still, trade contributed 0.87 percentage point to GDP growth and not 0.83 percentage point as reported last month.
Businesses increased spending to restock after running down inventories in the second quarter, but just not as much as previously reported. Businesses accumulated inventories at a $7.6 billion rate in the last quarter, almost half of the $12.6 billion pace reported last month.
That means inventory accumulation contributed 0.49 percentage point to GDP growth and not the 0.61 percentage point reported last month.
Investment in residential construction fell at a 4.4% rate instead of the previously reported 6.2 percent pace. Government spending was revised lower.