U.S. economic growth perks up in third quarter

The U.S. economy expanded at a 2.8 percent annual rate from July through September, a surprising acceleration ahead of the 16-day partial government shutdown. But much of the strength came from a buildup in company stockpiling.

Home construction also rose, and state and local governments spent at their fastest pace in four years. But businesses spent less on equipment, federal spending fell, and consumers spent at a slower pace. All are cautionary signs for the final three months of the year.

Overall, growth increased in the third quarter from a 2.5-percent annual rate in the April-June period to the fastest pace in a year, the Commerce Department said Thursday. This was the first of three reports scheduled for the third-quarter numbers; the results typically vacillate as new information comes to light.

The third-quarter growth was nearly a full percentage point stronger than most economists had predicted. Analysts noted that much of the unforeseen strength came from a buildup in company inventories. That suggests that businesses overestimated consumer demand.

Restocking contributed 0.8 percentage point to growth—double its contribution in the second quarter.

Sal Guatieri, an economist at BMO Capital Markets, predicts that companies will cut back on restocking in the October-December quarter. He thinks less stockpiling, along with the effects of the shutdown, will slow growth to an annual rate below 2 percent this quarter.

Consumers stepped up spending on goods last quarter, but the pace of their increase weakened to a 1.5-percent annual rate from a 1.8-percent rate in the previous quarter. Spending on services was essentially flat, partly because of a cooler summer that lowered utility spending.

Spending by consumers is critical to growth because it drives roughly 70 percent of economic activity. Higher taxes this year and slow wage growth have weighed on consumers since the start of the year.

Exports rose at a 4.5-percent rate in the third quarter, helped by stronger economies overseas. Still, businesses cut back on investment in equipment by the most in a year.

Overall government activity grew at a slight 0.2-percent rate, reflecting a 1.5-percent rise in state and local government spending—the best showing since the spring of 2009. Federal government spending dropped again, falling at a 1.7-percent annual rate.

Analysts say the shutdown could cut more than half a percentage point from annual growth in the October-December quarter. The shutdown cost the U.S. economy an estimated $24 billion, according to Beth Ann Bovino, an economist at Standard & Poor's.