Last updated: November 29, 2012 2:37 pm

US economic growth strengthens

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There was a sharp upward revision to estimates of US growth in the third quarter but an ambiguous report cast doubt on the underlying strength of the world’s largest economy.

Data from the commerce department showed the economy grew at a 2.7 per cent annual rate in the July to September quarter, compared with the 2 per cent initially estimated last month.

But the cause of the revision was much faster growth in business inventories – which cannot be sustained for long – more than offsetting lower estimates of consumption and business spending on equipment.

That suggests there is less momentum in the economy and it may be more vulnerable to a shock from the fiscal cliff of tax rises and spending cuts due at the end of the year.

“The real story here is the business inventory build,” said Tim Hopper, chief economist for TIAA-CREF, the insurer and asset manager. Mr Hopper argued that the overall picture is positive, with business ramping up production, and a stronger contribution from construction.

But unless inventories rise further, the fourth quarter may be weak. “Some unusual boosts to the third quarter will not repeat in the fourth,” said Steven Wieting, US economist at Citi Investment Research. “Government outlays rose 3.5 per cent on a 12.9 per cent surge in defence spending, which seems likely to reverse near term.”

Growth in consumption was revised down from an annual rate of 2 per cent to 1.4 per cent, business spending on equipment and software was revised from flat to a fall of 2.7 per cent, but the inventory rise contributed 0.8 percentage points to total growth.

Gross domestic income, an alternative measure of growth that is sometimes more accurate, rose at a feeble annualised rate of just 1.7 per cent.

Overall, the numbers point to a sluggish economy that is still not growing fast enough to create a lot of jobs, even though fundamentals such as housing are on the mend.

Separate data showed the number of Americans filing new claims for unemployment insurance fell last week, as the effects of superstorm Sandy, which caused disruption to the labour market, began to weaken.

Initial claims for jobless benefits dropped 23,000 to a seasonally adjusted 393,000 in the week to November 24, from an upwardly revised 416,000 the week before, the Labor Department said. Economists surveyed by Bloomberg had expected a level of 390,000.

“Sandy’s impact, although waning, is likely to be biasing the numbers upward, as we know the lights were out for a long time in some places,” said Jill Brown, vice-president of economics at Credit Suisse.


US political and economic map

A detailed evaluation of the condition of the US economy state by state

Meanwhile, housing data from the National Association of Realtors showed pending home sales – contracts that have been signed but not closed – rose strongly in October.

NAR’s index rose 5.2 per cent to 104.8 in October from an upwardly revised 99.6 in September. This came in well above analysts’ expectations for a 1 per cent gain.

Pending home sales are up 13.2 per cent above October 2011 when it was 92.6.

The data followed new home sales numbers on Wednesday, which although weaker still pointed to a steady US housing market recovery.

Economists say home sales have increased by 40 per cent since their trough, the visible inventory has almost halved from its peak and now sits below normal levels, while housing starts have risen by 40 per cent over the past year. Home prices too are on the rise.

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