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December 5, 2013 3:10 pm
US growth in the third quarter was revised up from an annualised rate of 2.8 per cent to 3.6 per cent in another bit of good economic news that increases the chances of an early slowing in Federal Reserve asset purchases.
However, the main cause of the revision was a larger increase in business inventories than previously thought – they contributed 1.7 percentage points of the total growth – so the pace of expansion seems unlikely to be sustainable.
Overall, the revisions were encouraging because they pointed to some momentum in the world’s largest economy. But the underlying pace of growth after stripping out temporary factors such as inventories remained stuck around 2 per cent.
Paul Ashworth, chief US economist at Capital Economics in Toronto, said the release “certainly adds to the evidence that the recovery is gaining momentum” despite the reliance on inventories. “At the margin, it points to an earlier QE taper by the Fed,” he said.
Perhaps more important to the Fed were the upward revisions to its preferred measure of inflation for the third quarter. The core price index for personal consumption expenditures was revised up to an annualised rate of 1.5 per cent from 1.4 per cent for the third quarter, while the overall price index was revised up from 1.9 to 2 per cent.
By comparison with the previous year, price rises were still extremely weak, with the core index up just 1.2 per cent and the overall index up by 1.1 per cent, well below the Fed’s goal of a 2 per cent rise.
Signs that inflation was stabilising, however, may give the Fed more confidence to “taper” its asset purchases from the rate of $85bn a month.
The release also reported an alternative way to calculate output – gross domestic income – which rose by an annualised 1.4 per cent in the third quarter. However, that follows much more rapid growth in GDI in previous quarters, such that it is running well ahead of GDP.
Although GDI and GDP are different ways to measure the same thing, some research suggests that initial releases of GDI are more accurate, and the Fed monitors the gap between them carefully.
“Real GDI is up 3.0 per cent over the past four quarters combined, versus just a 1.7 per cent increase in real GDP,” said Jim O’Sullivan, chief US economist at High-Frequency Economics in New York. “The pattern adds to our suspicion that some of the recent divergence between solid employment growth and weaker GDP will eventually be closed with upward revisions to GDP.”
Separately, the labour department reported a big drop in claims for unemployment insurance last week, down by 23,000 to 298,000. However, the figure may have been distorted by the Thanksgiving holiday.
The Fed will decide on December 18 whether it is ready to slow the asset purchases that have driven global financial markets for more than a year. The single most important input to its decision – non-farm payrolls numbers for November – are due on Friday.
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