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Consumers, exports give economy muscle in the third quarter

| Tuesday, Nov. 29, 2016, 9:36 p.m.

WASHINGTON — The economy grew faster than initially thought in the third quarter, notching its best performance in two years, buoyed by strong consumer spending and a surge in soybean exports.

Gross domestic product increased at a 3.2 percent annual rate instead of the previously reported 2.9 percent pace, the Commerce Department said Tuesday in its second GDP estimate. Growth was the strongest since the third quarter of 2014 and followed the second quarter's anemic 1.4 percent pace.

Output was also lifted by upward revisions to business investment in structures and home building, underscoring the economy's solid fundamentals that further bolster the case for the Federal Reserve to raise interest rates next month.

“I was willing to entertain the possibility that as energy prices rose, real spending would moderate a tad,” Stephen Stanley, chief economist for Amherst Pierpont Securities, wrote in a research note Tuesday. “However, just when the data seemed to be pointing in that direction (with the 2.1 percent Q3 initial print), we learn that in actuality, spending increased at close to the 3 percent clip in the summer after all.”

Data ranging from housing to retail sales and manufacturing suggest the economy retained its momentum early in the fourth quarter even as exports appear to be faltering amid a reversal of the soybean boost. The Atlanta Fed is forecasting GDP rising at a 3.6 percent rate in the fourth quarter.

Forecast positive

The economy could gain more muscle next year if President-elect Donald Trump succeeds in pushing through Congress a fiscal stimulus plan that includes massive infrastructure spending and tax cuts, analysts say.

“Couple that with an increasingly enthusiastic consumer supported by stronger wage gains, and the economy appears well-positioned to remain on a growth path heading into 2017,” said Jim Baird, chief investment officer at Plante Moran Financial Advisors in Kalamazoo, Mich.

Economists had forecast third-quarter GDP growth being revised up to a 3.0 percent rate.

When measured from the income side, the economy grew at a 5.2 percent clip amid a rebound in corporate profits. That was the fastest pace of increase in gross domestic income in nearly two years and followed a 0.7 percent rate of expansion in the second quarter.

The average of GDP and GDI, which economists consider to be a more accurate measure of current economic growth and a better predictor of output, increased at a 4.2 percent rate in the third quarter, the fastest pace in two years.

That followed a 1.1 percent rate of increase in the second quarter and likely exaggerates the economy's strength.

The dollar initially hit a session high against a basket of currencies after the data, before surrendering gains to trade flat. Prices for U.S. government bonds fell, while stocks on Wall Street rose modestly.

The third-quarter revision showed a much more favorable growth profile for the economy. The boost from inventories was not as big as previously estimated, which suggests that businesses are not sitting on piles of unwanted goods.

This means they will have more scope to place new orders, which augurs well for economic growth in the coming quarters. The sharp acceleration in GDP in the last quarter should quash any lingering fears that the economy is at risk of stalling after growth averaged just 1.1 percent in the first half.

That together with a labor market that is near full employment and steadily rising inflation could leave the Fed comfortable to hike interest rates at its Dec. 13-14 policy meeting. The U.S. central bank raised its overnight benchmark interest rate in December for the first time in nearly a decade.

Consumer sentiment surges

The Commerce Department said consumer spending, which accounts for more than two-thirds of U.S. economic activity, increased at a 2.8 percent rate in the third quarter and not the 2.1 percent pace reported last month. That was still a slowdown from the second quarter's robust 4.3 percent pace.

With a tight labor market lifting wage growth and boosting household sentiment, consumer spending is likely to gain further momentum for the rest of the year and in 2017. Rising house prices are also likely to keep consumption supported.

A separate report from the Conference Board showed its consumer sentiment index surged in November, climbing back to pre-recession levels. Consumers were upbeat about the labor market and current business conditions. Another report showed house prices increased 5.1 percent in September from a year ago.

Spending on nonresidential structures, which include oil and gas wells, was revised sharply higher to show it increasing at it fastest pace since the first quarter of 2014.

Business spending on equipment, however, fell at a steeper rate than previously reported, declining for a fourth straight quarter. With after-tax corporate profits rising at a 7.6 percent pace last quarter there is scope for business investment to rebound. Corporate profits declined at a 1.9 percent rate in the second quarter.

Exports grew at their quickest pace since the fourth quarter of 2013, driven by a surge in soybean exports after a poor soy harvest in Argentina and Brazil. Trade contributed 0.87 percentage point to GDP growth and not 0.83 percentage point as reported last month.

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