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Isabel Zhong/ MEDILL

Consumer spending, which makes up more than two-thirds of GDP, was revised sharply downwards.


Upward revision of third-quarter GDP not as positive as it seems

by Isabel Zhong
Nov 29, 2012


Preliminary figures showed the nation’s economic output grew at a faster pace than initially thought in the third quarter of 2012 as businesses added to their inventories and exports rose. However, consumer spending was revised sharply downwards, giving a bleak reminder of underlying weakness in the economy.

“The dirt is always in the details; the details underlying revisions to the third quarter were not as reassuring as the headline figures suggest,” said Diane Swonk, chief economist at Mesirow Financial in Chicago, in her blog.

The second estimate of third-quarter inflation-adjusted GDP showed the nation’s economy expanded at an annual rate of 2.7 percent in the three months ended Sept. 30. This painted a brighter picture than last month’s advance estimate, which indicated economic output grew only 2 percent. However, economists surveyed by Bloomberg were expecting third-quarter GDP to increase at a slightly faster rate of 2.8 percent.

“Much of the increase can be attributed to upward revisions in inventories, which will need to be drained later in the year,” Swonk wrote.

Business inventories were much higher than initially gauged, adding 0.77 percentage points to the overall GDP growth rate. This was a sizable swing from last month’s estimate of a slight decline. Business inventories in September were 6.2 percent higher than a year ago, according to the U.S. Census Bureau. This was primarily driven by the auto industry where buoyant inventory growth occurred in both August and September.

However, after adjusting for business inventories, which are excluded from final GDP figures, third-quarter economic output grew only 1.9 percent. This was lower than last month’s advance estimate of 2.1 percent.

“Consumer spending was revised lower, almost as much as real GDP was revised higher,” Swonk wrote.

Preliminary figures put growth in consumer spending, which makes up more than two-thirds of GDP, at 1.4 percent, much lower than the advance estimate of 2 percent. Growth in private investment also was adjusted downwards to 1.6 percent from 2.2 percent.

“The weakness in business investment is of particular concern to the Federal Reserve as it not only undermines growth today; it also undermines growth in the future,” Swonk wrote.

On a brighter note, the country exported more goods and services than initially thought. Preliminary figures showed exports, which contribute to around 10 percent of GDP, actually grew 1.1 percent, in contrast with the advance estimate of a 1.6 percent decrease. The nation’s trade deficit narrowed more than 5 percent in September as exports outpaced imports for first time in the third quarter.

Government spending did not differ substantially from last month’s advance estimate. It was revised only marginally downwards to 9.5 percent from 9.6 percent.

The final GDP growth rate for the third quarter will be released Dec. 12.