Covering the economic surprise

The U.S. gross domestic product grew more than expected in the third quarter. But some of the coverage wasn’t positive as reporters actually dug into the causes for the increase.

Here’s the beginning of the Wall Street Journal story:

The U.S. economy expanded significantly faster than initially estimated in the third quarter as businesses fattened their inventories, a factor that is likely to weigh on growth in the year’s final quarter.

Gross domestic product, the broadest measure of goods and services produced in the economy, grew at a seasonally adjusted annual rate of 3.6% from July through September, the Commerce Department said Thursday. The measure was revised up from an earlier 2.8% estimate and marks the strongest growth pace since the first quarter of 2012.

The upgrade was nearly entirely the result of businesses boosting their stockpiles. The change in private inventories, as measured in dollars, was the largest in 15 years after adjusting for inflation.

As a result, inventories are likely to build more slowly or decline in the current quarter, slowing overall economic growth. The forecasting firm Macroeconomic Advisers expects the economy to advance at a 1.4% rate in the fourth quarter. Other economists say the pace could fall below 1%.

“The meat and potatoes of the economy are still trending pretty low,” said Scott Brown, chief economist at Raymond James & Associates.

The New York Times added the caveat that the growth was based on less-than-desirable factors:

Inventory changes are notoriously volatile, so while the healthier signals would be welcomed by economists, inventory gains can essentially pull growth forward into the third quarter, causing fourth-quarter gains to slacken.

Indeed, Wall Street was already estimating that the fourth quarter of 2013 would be much weaker than the third quarter, with growth estimated to run at just below 2 percent, according to Bloomberg News.

The anemic pace of fourth-quarter growth also stems from the fallout of the government shutdown in October, as well as the continuing fiscal drag from spending cuts and tax hikes imposed by Congress earlier in 2013.

Still, if the better data on growth from the Commerce Department on Thursday is followed by more robust numbers Friday for the nation’s November job creation and unemployment, it increases the odds the Federal Reserve will soon ease back on stimulus efforts. The jobs data is scheduled to be released by the Labor Department at 8:30 a.m. Friday.

The Reuters story did a good job of breaking down the numbers and explaining why they weren’t as robust as first seemed:

Inventories accounted for a massive 1.68 percentage points of the advance made in the July-September quarter, the largest contribution since the fourth quarter of 2011. The contribution from inventories had previously been estimated at 0.8 percentage point. Stripping out inventories, the economy grew at a 1.9 percent rate rather than the 2.0 percent pace estimated last month.

A gauge of domestic demand rose at just a 1.8 percent rate. The strong inventory accumulation in the face of a slowdown in domestic demand means businesses will need to draw down on stocks, which will weigh on GDP growth this quarter.

Fourth quarter growth estimates are already on the low side, with a 16-day shutdown of the government in October expected to shave off as much as half a percentage point from GDP.

Consumer spending, which accounts for more than two-thirds of U.S. economic activity, was revised down to a 1.4 percent rate, the lowest since the fourth quarter of 2009. Spending had previously been estimated to have increased at 1.5 percent pace.

The Washington Post blog’s headline said it most clearly — “put away the champagne”:

But there’s a bigger story here than the weird blips to GDP being driven by inventories. It’s that we keep getting mixed signals on how robust the U.S. economy really is as 2014 approaches. Some recent data have been good. The Institute for Supply Management survey of manufacturers for November indicated the strongest growth in output since the spring of 2011. The number of people filing new claims for jobless benefits has been hitting rock-bottom levels (including only 298,000 last week, the Labor Department said Thursday, though that was dragged downward by seasonal adjustment quirks tied to the late Thanksgiving).

At the same time, overall growth has remained tame once inventory effects are taken out, and we’ve seen enough false starts and moments of unjustified optimism during this long, slow recovery that policymakers, particularly those at the Federal Reserve, may want more overwhelming evidence that things are picking up before taking it for granted that above-trend growth has finally arrived.

Which brings us to the November jobs report, due out Friday morning at 8:30. Yes, it’s worth mentioning all the usual caveats about not putting too much faith in any one data point, the large margin of error in the survey, the revisions that could ultimately make the initial reading meaningless.

All that’s true, but you go to battle (or in this case, set monetary policy) based on the data you have, not on the data you might wish to have. So the Friday jobs numbers, which analysts expect will show 185,000 net jobs added in November, are the single most important data point in determining whether the Fed begins slowing its monthly bond purchases at its Dec. 17-18 policy meeting. And for the rest of us, it will be the best indicator of whether this recovery is starting to take off, or whether the long slog continues apace.

Despite the numbers, it looks like the economy isn’t doing as well as it might appear on the surface. The numbers don’t lie.