US third quarter growth cut sharply to 2.0%

The estimate of US growth in the third quarter was cut to 2.0 percent on Tuesday, sharply lower than the 2.5 percent initial estimate that gave markets hopes the economy was rebounding. The Commerce Department attributed the cut to to businesses drawing down inventories without spending to replace them, along with slower state and local government spending. The cut surprised economists. On the positive side, the expanded data behind the new estimate confirmed that personal consumption and some businesses spending picked up in the July-September period, after the economy's near-stall in the first half. Personal consumption grew at an annual pace of 1.6 percent in the quarter, compared to just 0.5 percent in the second quarter, when fears mounted of the country returning to recession as consumers shut their wallets. And while businesses' fixed investments picked up to a 1.6 percent annual rate, a contraction in inventories meant that overall investment shrunk at an 0.1 percent pace. The other key weight on growth was tighter spending by authorities at all levels. While federal spending still expanded, albeit slower than the previous quarter, at the state and local level spending continued to contract as authorities strained to balance budgets. Economists said the upside was that businesses will likely have to restock in the fourth quarter, meaning that overall growth should be picking up. "The entire downward revision to growth can be accounted for by the liquidation of inventories," said John Ryding and Conrad DeQuadros of RDQ Economics. "The liquidation of inventories is likely to be a positive for growth in the fourth quarter with inventory-sales ratios at low levels." RDQ estimates GDP will expand by 3.0 percent in the October-December quarter.