The economy is growing faster than initially thought, according to a Thursday report, but it may be taking on more fat than muscle, which could slow down growth in the final few months of the year, economists say.
Real gross domestic product grew by an annual rate of 2.7 percent in the third quarter, up from an initially reported 2.0 percent, according to a Thursday morning Commerce Department report. But the drivers of growth aren’t encouraging and suggest a weaker fourth quarter, already beleaguered by concerns over whether lawmakers will avert an impending fiscal crisis.
“It was hard to find much good outside of the topline number, to be honest with you,” said Scott Hoyt, senior director of consumer economics for Moody's Analytics.
Forty percent of the third-quarter growth came from a buildup in inventories—materials or finished products held by businesses—Hoyt said. The data suggest that the supply buildup was involuntary, said Robert DiClemente, chief U.S. economist for Citigroup Global Markets.
“[It’s] not people all balled up about growth and preparing for a strong holiday season and stuff like that,” he said. “This looks like it was a residue of production that went maybe a little ahead of demand.”
And while production was revised up in Thursday’s report, demand was revised down. Business spending on equipment and software was changed to -2.7 percent from 0 percent, while consumer spending grew only 1.4 percent, compared to an initial estimate of 2.0 percent.
“That sapped momentum from a consumer that’s in desperate need of it,” said Tom Porcelli, chief U.S. economist at RBC Capital Markets. Holiday shopping “started pretty decent,” he said. “But the follow-through here will be critical.”
With greater supply and less demand in the third quarter than initially thought, the fourth-quarter will likely show weaker-than-expected growth, too, economists said. Estimates range from less than 1.0 percent to 2.0 percent.
And how and whether lawmakers deal with the so-called “fiscal cliff”—$500 billion in spending cuts and tax hikes scheduled to go into effect at the end of the year—could weigh heavily on the economy as well.
"The longer this drags on, the more you start to think about a Pyrrhic victory," DiClemente said. "You save the economy at the expense of really stalling things for a period of time."
Catherine Hollander contributed.