U.S. economic growth revised up for third quarter, which could ease path for Fed rate hike

Reporting from Washington —  The U.S. economy grew at a faster pace over the summer than initially estimated, a positive sign that could help convince Federal Reserve policymakers to raise a key interest rate next month.

Total economic output, also known as gross domestic product, increased at a 2.1% annual rate from July through September, the Commerce Department said Tuesday.

The figure was up from the initial estimate of 1.5% annual growth in the quarter, which had reflected a sharp cutback by businesses on their inventories in the face of a global economic slowdown.

The economy had grown at a 3.9% annual rate in the second quarter.

New data showed that the reduction in inventories in the third quarter wasn’t as severe as first reported.

Businesses reduced their inventories by $23.3 billion in the third quarter, compared with the earlier estimate of a $56.8-billion drop, the Commerce Department said.

Economists had expected third-quarter growth to be revised up to 2.1%.

Ian Shepherdson, chief economist at Pantheon Macroeconomics, said the new data shows the government “hugely underestimated” how much retailers and wholesalers did to restock their shelves in September.

He forecast that fourth-quarter growth would be 3%, a bit lower than he earlier had expected, because the inventory revision should mean that businesses would not have to catch up as much at the end of the year.

Consumer spending in the third quarter was solid, growing at a 3% annual rate, which was revised down 0.2 percentage points from the initial estimate. And a measure of business investment was revised up to 2.4% after increasing 4.1% in the second quarter.

Following a very weak first quarter, the economy is on pace for annual growth this year of about 2.4%. That would be the same as last year.

The improved third-quarter figures add to the positive economic data, including a strong October jobs report, pushing Fed officials to signal an interest-rate hike could come next month.

The so-called federal funds rate has been near zero since late 2008 in an attempt to stimulate the economy.

Fed policymakers have said they could raise the rate slightly in December if the jobs market continues to improve and inflation appears to be increasing toward the central bank’s 2% annual target.