As expected, real GDP was revised up in the third quarter, to 3.3% annualized, versus the 3.0% in the BEA’s advance estimate of 3.0%.
Part of the upward revision was related to stronger business investment (+4.7%, up from 3.9%). Spending on equipment grew 10.4% (previously 8.6%) and investment in intellectual property was up 5.8% (prev. 4.3%). These upward revisions more than offset a downgrade to spending on structures (-6.8% versus -5.2%).
Other areas of upward revisions were government spending, which now grew 0.4% (prev. -0.1%), and inventories. Investment in inventories contributed 0.8%-points to growth in Q3, a hair above the 0.7%-point contribution in the advance estimate.
Consumer spending was revised down slightly, to 2.3% from 2.4%. This is not overly concerning as household spending was held back in many regions by hurricane activity. Residential investment subtracted less than previously thought, contracting by 5.1% (prev. -6.0%).
Corporate profit growth accelerated (after IVA and CCA) in the third quarter, up $91.6bn (18.4% annualized), after a 2.8% gain in the second. This gain was entirely driven by financial corporations.
Key Implications
Given the data seen since the advance GDP report, today’s upgrade was largely expected. Still, economic growth at a three-year high is likely to garner some positive headlines. Today’s data confirms that the U.S. economy has had back-to-back quarters of 3%+ growth for the first time in three years. To a certain extent, the strength in Q3 borrows a bit from Q4, where we expect growth to ease very slightly to closer to 2 ½% — still well-above the economy’s potential rate (around 2.0%).
FOMC members were already pretty upbeat about economic growth, and a hike at December’s meeting was essentially fully priced in before this release. Still, fixed income yields have pushed higher on the positive headlines.
