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Third-quarter GDP revised higher, to 2.2%

Profits up 4.2%, but growth in wages revised much lower:

By Rex Nutting, MarketWatch
Last Update: 8:58 AM ET Nov 29, 2006

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WASHINGTON (MarketWatch) -- The U.S. economy grew at a 2.2% annual pace in the third quarter, a bit faster than the 1.6% initially estimated, the Commerce Department reported Wednesday in its first revision to the gross domestic product report.

Revisions stemmed largely from greater building of inventories and lower imports than originally assumed. Business investment also grew more than first thought, while consumer spending was slightly slower.

Final sales of domestic product increased 2.1%, up from the 1.7% originally reported.

Meanwhile, a key measure of core inflation was revised a tenth of a percentage point lower, to 2.2%. Year-over-year growth in the core personal consumption expenditure price index was unrevised at 2.4%, thus remaining well above the Federal Reserve's implied target of 1% to 2%

The nation's GDP growth ran at a 2.6% rate in the second quarter.

The economy has grown 3% in the past year in real terms, just about the rate economists say is the long-term potential. In nominal terms, GDP was at an annual rate of $13.33 trillion in the third quarter.

Economists had expected GDP to be revised up to 1.8%, according to a survey conducted by MarketWatch.

The report had little immediate impact in financial markets.

The small revisions to GDP probably won't alter the views of the Federal Reserve or private economists about the near-term path of economic growth or inflation. However, a revision to second-quarter wage growth implies much less inflationary pressures are building than policymakers have assumed.

On Tuesday, Fed chief Ben Bernanke said he believed growth and inflation were moderating just as the Fed had projected. He expressed no urgency to lower interest rates to keep the economy growing, saying an outbreak of inflation, though not likely, remained the greatest risk.

As in the first GDP estimate, consumer spending accounted for most of the economic growth, with business investment also contributing.

A third of the growth came from the output of motor vehicles. Conversely, residential investment and net imports were a drag on growth.

Excluding motor vehicle output, GDP grew 0.9%, according to the government's revised data.

Profits higher, wages lower:

Corporate profits increased 4.2% at a quarterly rate, or $66.2 billion, in the third quarter, compared with a 1.4% gain in the second quarter. Profits were up 30.9% on a year-on-year basis, the fastest growth in 22 years, but the comparison came against the devastating impact that Hurricane Katrina had on profits last year.

The report also showed that wages and salary growth was much lower than expected in the second quarter. The revised estimates show real disposable incomes falling 1.5% in the second quarter, compared with a 1.7% gain previously reported. Real disposable incomes rose 3.7% in the third quarter.

The revision to wages and salaries is significant to the Fed, because it implies that unit labor costs have not risen as fast as assumed. Slower growth in unit labor costs would turn down the heat on inflation -- although, of course, it would also mean that workers had less money to spend.

As a result, the personal savings rate was even lower than assumed: a negative 1.4% in the second quarter and a negative 1.3% in the third quarter.

Details:

Consumer spending increased 2.9% in the third quarter, up from 2.6% in the second quarter, and contributed two percentage points to growth. Spending on durable goods rose 6%, which spending on nondurables grew 1.1% and spending on services increased 3.1%

Business investments increased 10%, up from 4.4% in the second quarter, and contributed one percentage point to growth. Investments in structures rose 16.7%, while investments in equipment and software increased 7.2%

Inventory building added 0.2 of a percentage point to growth.
On the flip side, residential investment fell 18%, marking the largest decline in 15 years. Home building cut 1.2 percentage points from growth.

Net imports cut 0.2 percentage point from growth, with imports increasing 5.3% while exports were rising by 6.3%.
Government spending rose 2.2%, adding 0.4 percentage point to growth.

Rex Nutting is Washington bureau chief of MarketWatch.