(Bloomberg) -- The U.S. economy expanded in the third quarter at a faster rate than previously estimated as consumers stepped up spending on services such as health care and companies invested more in software.
Gross domestic product climbed at a 4.1% annualized rate, the strongest since the final three months of 2011 and up from a previous estimate of 3.6%, Commerce Department figures showed today in Washington. The median forecast of 72 economists surveyed by Bloomberg projected a 3.6% pace after 2.5% in the second quarter.
Inventories accounted for a third of the gain in GDP, showing companies were confident about the prospects for demand. Retail sales jumped in October and November, underscoring the Federal Reserves view of an improving economy.
The wealth effects resulting from rising equities and house prices are being reinforced by improving conditions in labor markets, which is leading to pretty healthy gains in wages and salaries, said Ben Herzon, a St. Louis-based economist at Macroeconomic Advisers. All of that is coming together to create accelerating private domestic demand, which bodes well for GDP growth heading into next year.
Forecasts for GDP, the value of all goods and services produced in the U.S., ranged from gains of 3.3% to 3.8%, according to the Bloomberg survey. The GDP estimate is the third and final for the quarter.
Consumer purchases, which accounts for almost 70% of the economy, increased 2%, more than the previously reported 1.4%, the revised data showed.
Spending on services contributed 0.32 percentage point to third-quarter growth, up from a previously reported 0.02 percentage point. In addition to the pickup in outlays for health care, Americans spent more on recreational services.
Inventories increased at a $115.7 billion annualized pace in the third quarter, the most in three years, after a previously reported $116.5 billion annualized rate. In the second quarter, they rose at a $56.6 billion pace.
Stockpiles added 1.67 percentage points to GDP last quarter, little changed from the 1.68 percentage-point contribution in the previous reading.
While economists grew more optimistic about demand in the fourth quarter, GDP will nonetheless be restrained as the pace of inventory growth cools.
JPMorgan Chase & Co. economists project the economy will grow 2% from October through December, up from the 1.5% rate they had penciled in prior to the Commerce Departments Dec. 12 retail sales report. Barclays Plc has raised its fourth-quarter tracking estimate to 2.3% from 2% before the retail figures.
Domestic final sales, which exclude inventories, increased 2.5% in the third quarter compared with a previously reported 1.9% increase.
Corporate spending on equipment rose 0.2%, compared with a previous reading of no change. Business investment in intellectual property was revised up to a 5.8% increase from 1.7%, reflecting more spending on software.
Further investment will depend on how much confidence companies have that the economy will accelerate.
Honeywell International Inc., whose products range from cockpit controls to thermostats, expects capital expenditures in the range of $1.2 billion or more in 2014, up about 30% from this year.
Were very disciplined in terms of cap-ex, Chief Financial Officer David Anderson said on the companys 2014 guidance call on Dec. 17, referring to capital expenditures. We really have to see the whites of the eyes of the economic return characteristics to really commit.
Economic indicators are pointing to just a continued resilience, not exuberance, but resilience and expansion in the U.S. economy, Anderson added.
Todays report also included corporate profits. Before-tax earnings rose at a 1.9% rate after climbing at a 3.3% pace in the prior period. They increased 5.7% from the same time last year.
Residential real estate is underpinning the economy, as rising prices boost household wealth and growing demand helps the industry overcome rising mortgage rates.
Home construction increased at a 10.3% annualized rate in the third quarter. While slower than the 13% pace previously reported, the figure primarily reflected revisions to brokers commissions and other ownership transfer costs, todays report showed.
Data from the Commerce Department this week showed that housing starts jumped 22.7% to a 1.09 million annualized rate, the most since February 2008, while permits for future projects also held near a five-year high, indicating that the pickup will be sustained into next year.
Other signs show that fiscal drag, which weighed on growth during 2013, will start to ease. U.S. lawmakers this week passed the first bipartisan federal budget produced by a divided Congress in 27 years, easing $63 billion in automatic spending cuts and averting another government shutdown.
Government outlays increased 0.4% in the third quarter, led by a 1.7% gain in state and local spending that was the same as the previous reading. Federal spending decreased 1.5%.
Tighter fiscal policy has made stimulating the U.S. economy even more of an uphill battle for the Fed. The central bank this week announced it would scale back its bond purchasing program, known as quantitative easing, by $10 billion to $75 billion a month after seeing an improved outlook for the labor market.
This has been done in the face of a very tight, unusually tight fiscal policy for a recovery period, Chairman Ben Bernanke said Dec. 18 during a press conference at the conclusion of a two-day meeting of the Federal Open Market Committee. So I do think its been effective, but the precise size the impact is something I think that we can very reasonably disagree about and that work will continue on.
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