Business News

Faster pace of growth may not last long

Nelson Schwartz
A worker reaches for glass to assemble a double-pane window frame at Crystal Windows & Doors IL Manufacturer in Chicago.
Tim Boyle | Bloomberg | Getty Images

Stoked by rising inventories, the American economy grew at a significantly faster pace in the third quarter than first estimated, but probably at the expense of economic activity during the current quarter as businesses work off some of the excess stock on their shelves and in warehouses.

As investors digested the better-than-expected data on Thursday from the Commerce Department for July, August and September, many economists immediately cut their estimates for fourth-quarter growth. Barclays, for example, now expects the nation's gross domestic product to advance at only a 1.5 percent annual rate, down from 2 percent and far below the government's latest estimate of a 3.6 percent pace for the third quarter. A final revision is scheduled Dec. 20.

Still, the latest data comes at a time when other signs are pointing to improved economic performance next year, both in the United States and abroad, including more robust manufacturing activity and hiring.

In London on Thursday, British officials raised their projections for growth in 2013 and 2014, a sharp reversal from a year ago, when Britain was flirting with a double-dip recession.

(Read more: So far at least, austerity is winning the war)

On the Continent, however, the outlook is bleaker.

Need job growth for normal economy: Pro
Need job growth for normal economy: Pro

On Thursday, the European Central Bank raised its estimate for growth next year by just 0.1 percentage point to a still-anemic 1.1 percent; the central bank expects the euro zone — the 17 European nations that use the euro — to show a contraction of 0.4 percentage point once all the data for 2013 is in.

"All in all, we're seeing positive developments," Mario Draghi, the president of the central bank, said at a news conference, after the bank left its main interest rate unchanged at 0.25 percent.

The situation in Europe makes the United States look good by comparison, even if things are not as rosy as the latest figures from Washington might suggest.

"You can never be unhappy with a 3.6 percent number for gross domestic product," said Ian Shepherdson, chief economist at Pantheon Macroeconomics. "But the details are more sobering than the headlines. Apart from the inventory numbers, the revisions are pretty trivial."

"Either companies thought demand would accelerate and built inventories in anticipation of sales that didn't happen," Mr. Shepherdson added, "or they're building in anticipation of stronger demand in the fourth quarter." With demand uncertain in the final three months of the year, Mr. Shepherdson expects fourth-quarter growth will probably run at a pace of 1 to 2 percent.

The economy's performance in the final months of 2013 will also determine the denouement of one of the longest-running dramas on Wall Street — the timing of when the Federal Reserve begins easing its stimulus efforts. Investors and traders had expected policy makers to begin tapering its monthly $85 billion bond purchases in September, but the central bank held off because of mixed economic data.

(Read more: Is QE behind therally? Siegel and Wien debate)

Although the latest data on growth in gross domestic product comes after a series of better-than-expected figures in the United States, American central bankers don't appear to be in a rush to pull back on the stimulus. While they could act as soon as the next Fed meeting later this month, many analysts do not expect a move until early 2014.

On Thursday, the president of one regional Fed bank indicated that he remained cautious. "The strong third quarter doesn't make a trend," said Dennis P. Lockhart, president of the Atlanta Fed. "I am not prepared to interpret the revised third-quarter number as an indication that the economy is on a much stronger track — I think we're still on that relatively moderate growth track."

The spotlight on the Fed will grow more intense after Friday, when the Labor Department reports the latest figures for job creation and the unemployment rate in November. Although many economists say that the job market will remain cloudy because of the aftereffect of October's government shutdown, the report will be closely watched because it will provide the last major clue to the economy before Fed policy makers gather on Dec. 17 and 18.

"It's a big number," said Diane Swonk, chief economist at Mesirow Financial. "I think they won't taper in December, but it is close."

With a gain of 204,000 positions, the jobs data for October was surprisingly robust, catching most economists off-guard. On Friday, the consensus calls for payrolls to have increased by 185,000 last month with the unemployment rate falling to 7.2 percent, according to Bloomberg News.

More from the New York Times:

On Thursday, the Labor Department said initial weekly jobless claims unexpectedly dropped to 298,000, the lowest in more than two months.

Experts warn the numbers could be volatile, especially the unemployment rate, which is based on a survey separate from the one that tracks hiring and was affected heavily by furloughed government workers in October. The subsequent return of those workers could push the unemployment rate back down more sharply for November, economists said. If it drops to 7.1 percent, it would reach the lowest level in five years.

"The unemployment rate is a complete guess," said Ellen Zentner, senior United States economist at Morgan Stanley. Even if the more reliable payroll number is stronger than predicted, she said there was little chance of a Fed move this month because fourth-quarter growth looks so weak. Morgan Stanley expects the United States economy to expand by just 1 percent in the final three months of the year.

—By The New York Times. Stephen Castle, Julia Werdigier and Jack Ewing contributed to the report.