But inventories added just 0.8 percentage points to this growth in the quarter, and real final sales were 2%, Merrill economists explain in a recent report.
“In other words, the economy remains stuck in the mud," wrote Joshua Dennerlein and Ethan Harris in their latest analysis. "We believe that the Fed needs to see acceleration in growth before they will begin tapering.”
Moreover, the experts say we’re currently in “a tale of two consumers.”
“Overall consumer spending growth was 1.5% [quarter over quarter at a seasonally adjusted annual rate], marking the smallest increase in two years,” they noted. “There is a big divide in what the consumer is buying.”
Growth in purchases of goods, like cars and TVs, were a “very strong” 4.3%. However, spending on services (including those in the financial sector) was up a “very soft” 0.1%, the smallest increase since the recession began, the report says.
Capital expenditures fell 3.7% in the third quarter and have “been weak all year, averaging just 0.2% growth per quarter.
“The number one item, in our view, weighing on capex spending is the general weakness in the economy," Dennerlein and Harris wrote. "In general, as GDP growth accelerates, capex accelerates at a faster pace. We will need a breakout to 3% top-line GDP growth to achieve stronger capex growth, in our view.”
Uncertainty over government spending, shutdowns and fiscal policy are some factors causing uncertainty that keeps businesses from pulling the spending trigger.
On the upside, state and local governments boosted spending for the second quarter in a row. It rose 1.5% in Q3, after rising 0.4% in Q2, the report says, adding. “It’s early in the turn but the trend is positive for next year.”
When it comes to inventory buildup, which was significant in Q3, we may “get a payback in the opposite direction in the fourth quarter,” the economists say. “If the inventory build slows by $10 billion, all else equal, that would shave 0.3 percentage points off our Q4 GDP estimate.”
Check out Nouriel Roubini Warns of Bubbles in the Economic Broth on ThinkAdvisor.