US economy grows at 3.6% rate …

The U.S. economy expanded in the third quarter at a faster pace than initially reported, led by the biggest increase in inventories since early 1998. Consumer spending slowed.

 The pickup in GDP followed gains of 2.5 percent in the previous quarter and 1.1 percent in the first three months of the year. Photographer: Patrick T. Fallon/Bloomberg

Gross domestic product climbed at a 3.6 percent annualized rate, up from an initial estimate of 2.8 percent and the strongest since the first quarter of 2012, Commerce department figures showed today in Washington. The median forecast of 77 economists surveyed by Bloomberg predicted a 3.1 percent gain.

The buildup in stockpiles risks limiting factory production without stronger demand. Faster growth in household purchases, which grew at the slowest pace in almost four years, and a rebound in business investment would help companies justify increasing orders and adding workers.

“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,” said Lewis Alexander, chief economist at Nomura Holdings Inc. in New York, who forecast growth at 3.5 percent. Still, “the big missing ingredient is businesses being sufficiently confident to actually boost hiring and do capital spending.”

Forecasts for the increase in GDP, the value of all goods and services produced in the U.S., ranged from 2.2 percent to 3.6 percent, according to the Bloomberg survey. The GDP reading is the second of three for the quarter, with the final release scheduled for Dec. 20 when more information becomes available.

Another report today showed first-time claims for jobless benefits dropped by 23,000 to 298,000 last week, according to the Labor Department.

Stock Futures

Stocks fell for a fifth day as investors weighed the data to gauge the possible timing of a reduction in Federal Reserve stimulus. The Standard & Poor’s 500 Index declined less than 0.1 percent to 1,792.3 at 10:09 a.m. in New York.

The pickup in GDP followed gains of 2.5 percent in the previous quarter and 1.1 percent in the first three months of the year.

Inventories increased at a $116.5 billion annualized pace in the third quarter, the most since the first quarter of 1998, after a previously reported $86 billion rate. In the second quarter, they rose at a $56.6 billion pace. Stockpiles added 1.68 percentage points to GDP last quarter, double the initial estimate and the biggest contribution since the end of 2011.

Final Sales

Final sales, which exclude inventories, increased 1.9 percent in the third quarter after a 2.1 percent gain the prior three months.

Americans’ purchasing power rose at a slower pace. Disposable income adjusted for inflation increased at a 2.9 percent annualized rate from July through September after a 4.1 percent advance in the second quarter.

Today’s report also included revisions to second-quarter personal income. Wages and salaries increased by $77.2 billion, up from the previously reported gain of $54.6 billion. They rose about $46 billion in the third quarter.

The data also offered a first glance at corporate profits. Before-tax earnings rose at a 1.8 percent rate after climbing at a 3.3 percent pace in the prior period. They increased 5.6 percent from the same time last year.

Domestic Income

Gross domestic income, which reflects all the money earned by consumers, businesses and government agencies, increased at a 1.4 percent annualized rate in the third quarter after a 3.2 percent gain in the previous three months.

Companies and consumers were more frugal in the third quarter. Consumer spending, which is almost 70 percent of the economy, increased 1.4 percent, the smallest gain since the fourth quarter of 2009. Purchases added 0.96 percentage point to growth last quarter.

Corporate spending on equipment was stagnant in the third quarter, compared with a 3.7 percent decline previously reported. Such outlays may be slow to improve.

Demand for non-defense capital goods excluding aircraft, a proxy for future business investment in computers, electronics and other equipment, declined 1.2 percent in October after falling 1.4 percent the prior month. It was the first back-to-back decrease in a year, Commerce Department data showed Nov. 27.

Housing, Autos

Still, housing and autos remain bright spots for the economy. Residential construction increased at a 13 percent annualized rate, compared with a previous estimate of 14.6 percent, and added 0.38 percentage point to growth, today’s figures showed.

More home-construction permits were issued in October than at any time in the past five years, a sign the residential real-estate market is gaining momentum heading into 2014, according to data last week from the Commerce Department.

Auto sales remain on pace for their best year since 2007. General Motors Co. and Chrysler Group LLC led November U.S. sales gains that met or exceeded analysts’ estimates as dealers stepped up promotion of year-end offers to try to trim inventory. The industry’s annualized industry sales rate improved to 16.3 million in November, the strongest since May 2007, according to Ward’s Automotive Group.

Even as sales increased 7.1 percent in November at Ford Motor Co. (F), the Dearborn, Michigan-based automaker said it’s looking to cut back production by 2 percent in the first quarter compared with the same three months this year.

Managing Inventory

“We’re looking to manage our inventory, manage supply with demand, always,” Erich Merkle, a U.S. sales analyst at Ford, said in a Dec. 3 conference call. “In terms of the production, we are monitoring that very closely for the first quarter, and we could always have the ability, if we choose to, to add some back if necessary.”

Today’s report also showed price pressures are subdued. A measure of inflation, which is linked to consumer spending and strips out food and energy costs, rose at a 1.5 percent rate.

Federal Reserve officials are keeping an eye on inflation as they consider scaling back their $85 billion-a-month bond-buying program, known as quantitative easing. Policy makers have signaled they may taper “in coming months” if the economy improves as anticipated, according to minutes released Nov. 20 from the Fed’s Open Market Committee meeting concluded Oct. 30. Bloomberg

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