Revised GDP report shows better U.S. 3Q growth, adds fuel to possible Fed rate hike

The nation’s economy expanded in the third quarter at a rate better than previously reported, but still lost momentum from the second quarter when U.S. real gross domestic product (GDP) rose by a robust 3.9%.

The new GDP report, reported Tuesday (Nov. 24) by the U.S. Bureau of Economic Analysis, shows third quarter real GDP growth of 2.1% – six percentage points better than the earlier estimate of 1.5%. Tuesday’s report is the second revision for the third quarter following the first advance estimate on Oct. 29.

The new forecast, however, is still slightly behind the GDPNow model forecast of 2.3% projected by the Atlanta Fed on Nov. 18.

The new report will likely give more ammunition to interest hawks on the Federal Open Market Committee, who are expected to meet on Dec. 15 to consider the Fed first’s lift off of short-term interest rates under President Obama’s tenure. Last week, St. Louis Fed President James Bullard told a Fort Smith Regional Chamber of Commerce audience that he was bullish on the U.S. economy and that the central bank has room to raise interest rates based on the view.

The Fed rate has been near or at zero percent for seven years, far longer than most anticipated following stimulus actions taken by the Federal Reserve Bank after the Great Recession.

FOMC MINUTES ANALYSIS
Minutes released last week from the FOMC late October meeting show are highlighted by the 12-person monetary policy panel’s affirmation that the current zero to a quarter percent target range for the federal funds rate remains appropriate.

“In determining whether it will be appropriate to raise the target range at its next meeting, the Committee will assess progress – both realized and expected – toward its objectives of maximum employment and 2 percent inflation,” the FOMC statement said on Oct. 29. “This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.”

The committee, headed by Fed Chairwoman Janet Yellen, said it anticipates it will be appropriate to raise the target range for the federal funds rate when it has seen some further improvement in the labor market and is reasonably confident that inflation will move back to its 2% objective over the medium term. That view was supported by the nation’s October job report, which saw a whopping 277,000 new jobs added to the U.S. economy.

PERSONAL EXPENDITURES UP
According to the BEA, the GDP estimate released Tuesday is based on more complete source data than were available for the “advance” estimate issued last month. The improved real GDP in the third quarter primarily reflected an uptick in contributions from personal consumption expenditures (PCE), nonresidential fixed investment, state and local government spending, residential fixed investment, and exports that were partly offset by a negative contribution from private inventory investment.

On the other hand, the deceleration in GDP growth in the third quarter compared to the stronger second quarter reflected a downturn in private inventory investment and decelerations in exports, in PCE, in nonresidential fixed investment, in state and local government spending, and in residential fixed investment that were partly offset by a deceleration in imports.

Following are other highlights of the third quarter GDP advance report.

• Real gross domestic income (GDI)
The value of the costs incurred and the incomes earned in the production of goods and services in the nation’s economy increased 3.1% in the third quarter, compared with an increase of 2.2% (revised) in the second.

• Real gross domestic purchases
Consumption by U.S. residents of goods and services wherever produced increased 2.2% in the third quarter, compared with an increase of 3.6% in the second.

• Price index for gross domestic purchases
This index, which measures prices paid by U.S. residents, increased 1.3% in the third quarter, compared with an increase of 1.5% in the second. Excluding food and energy prices, the price index for gross domestic purchases increased 1.3%, compared with an increase of 1.2%.

• Current-dollar GDP
The market value of the goods and services produced by the nation’s economy less the value of the goods and services used up in production increased 3.4%, or $151 billion, in the third quarter to a level of $18 trillion. In the second quarter, current-dollar GDP increased 6.1%, or $264.4 billion.

On the corporate front, the revised report shows that profits of U.S. financial corporations decreased by $8.5 billion in the third quarter, in contrast to an increase of $34.6 billion in the second. Profits for domestic nonfinancial corporations slid 35% to $15.8 billion, compared with an increase of $24.3 billion in the previous quarter.

However, taxes on corporate income increased $2.3 billion in the third quarter, compared with an increase of $31.3 billion in the second. Dividends increased $27.1 billion in the third quarter, compared with an increase of $1.2 billion in the second.

The third-quarter advance estimate released Tuesday is based on incomplete source data that is subject to further revision by the BEA. The “third” estimate for the third quarter, based on more complete data, will be released on three days before Christmas on Dec. 22, 2015.