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U.S. GDP Growth Revised Up to 2.1% Rate in Third Quarter -- 3rd Update

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11/28/2019 | 12:32pm EDT

By Harriet Torry

WASHINGTON -- The U.S. economy headed into the holiday-shopping season on solid ground with a pickup in household spending and orders for long-lasting factory goods.

An initial snapshot of the year-end trends emerged Wednesday when the Commerce Department, in separate reports, said household spending picked up in October and orders for long-lasting factory goods rose -- both positive signs for growth.

The department also said the U.S. economy expanded at a slightly better pace than initially estimated in the third quarter, despite a continuing slump in business investment.

"Growth is still on track" despite recent challenges including a 40-day strike at General Motors Co. and the grounding of Boeing Co.'s 737 MAX airliner, said Brian Bethune, an economist at Tufts University.

Investors cheered both the economic data and optimistic comments Tuesday from President Trump on progress in the trade talks between China and the U.S., which drove the S&P 500 higher.

Gross domestic product -- the value of all goods and services produced across the economy -- rose at a 2.1% annual rate in the third quarter, adjusted for seasonality and inflation, the department said. That was up from the previous estimate of a 1.9% pace of growth, mainly due to stronger inventory investment.

The latest reading "indicates the economy is not about to fall off a cliff," Oxford Economics said in a note to clients. "However, the lingering global industrial slump, persistent trade policy uncertainty and cooling income growth all point to weaker activity in the coming months," economists Gregory Daco and Lydia Boussour said.

Growth in the fourth quarter, now in its ninth week, is shaping up to be a bit below the roughly 2% pace seen in the prior two quarters. Forecasting firm Macroeconomic Advisers on Wednesday projected GDP would expand at a 1.8% rate in the fourth quarter.

U.S. shoppers have been the economy's driving force over the past two quarters as business investment declined. The outlook is mixed on the extent to which consumers can keep fueling the economy through the holiday season and into next year.

The Commerce Department said households raised spending a seasonally adjusted 0.3% in October from September, but much of that increase was due to higher outlays on electricity and gas. Spending on long-lasting items like vehicles declined in October, and household incomes were flat overall.

Separately, the Federal Reserve in its "beige book" report of anecdotes from business contacts around the country on Wednesday said "outlooks generally remained positive, with some contacts expecting the current pace of growth to continue into next year."

The Fed report noted that business contacts in the Midwest and Northeast expected to see increased consumer spending during the holiday season. "Retailers were optimistic about sales in the coming months, looking forward to a boost from the holiday shopping season," the Cleveland Fed said.

Retailers reporting quarterly sales thus far also provide conflicting views on the health of the American consumer heading into the pivotal holiday season.

Department-store chains Kohl's Corp., Macy's Inc., Nordstrom Inc. and J.C. Penney Co. have reported weak sales, but Target Corp., Amazon.com Inc., Walmart Inc., Best Buy Co. and TJX Co s. have logged strong gains.

Jamie Lanza, co-founder of Tampa, Fla.-based fitness studio Camp Tampa, said the back-to-school months of September and October are typically slower than the earlier months of the year, but merchandise sales have increased headed into the holidays. "People are prioritizing things that feel good" like exercise classes, she said.

Business investment, though, remains a weak spot for the economy. Nonresidential fixed investment -- which reflects business spending on software, research and development, equipment and structures -- fell at a 2.7% annual rate in the third quarter following a 1% pace of decline in the prior quarter.

U.S. corporate profits also fell in the third quarter, according to the government's first broad estimate, due in part to legal settlements with Facebook Inc. and Google parent Alphabet Inc.

A key measure of business earnings -- profit after tax without inventory valuation and capital-consumption adjustments -- fell 0.6% from the prior quarter after rising 3.3% in the second quarter. Compared with the third quarter a year earlier, after-tax profits were down 0.4%.

Paul Miller, vice president of Park Hills, Missouri-based plastic and rubber product manufacturer MOCAP LLC, said business has slowed this year, particularly since June. He attributes that to uncertainty surrounding the U.K.'s exit from the European Union and the trade dispute with China.

The company's U.S. operation "is kind of holding steady, but it's just not in growth mode," he said. Still, the company is planning to build a new factory in Missouri due to savings the company made from the 2017 tax overhaul, which cut corporate tax rates and allowed immediate deductions for capital investment.

"For us, the tariffs, yeah they're negative, but the tax savings were so substantial that it's more of a nuisance, it wasn't devastating," Mr. Miller said.

One concern posed by weakness in corporate profits is that the labor market could deteriorate if boardrooms slow hiring or lay off workers to cut costs, which would likely hit consumer spending.

Still, for now the labor market remains strong. The number of Americans applying for first-time unemployment benefits fell last week, the Labor Department said Wednesday. More broadly, the unemployment rate was a low 3.6% in October and the labor market continued to add jobs, albeit at a slower pace than in the previous two months.

Wednesday's reports are unlikely to sway U.S. central-bank officials from their current wait-and-see stance on monetary policy.

The Federal Reserve has cut interest rates three times this year, most recently in October, on worries that weakness in manufacturing, trade and business investment could threaten the economic expansion by triggering cutbacks in hiring and consumer spending.

Officials meet in Washington in two weeks' time for the last scheduled policy gathering of 2019.

Speaking in Providence, R.I., on Monday, Fed Chairman Jerome Powell said that "as this expansion continues into its 11th year, the longest in U.S. history, economic conditions are generally good."

"If the outlook changes materially, policy will change as well," he said.

--Paul Kiernan contributed to this article.

Write to Harriet Torry at harriet.torry@wsj.com

Stocks mentioned in the article
ChangeLast1st jan.
ALPHABET INC. 1.94% 1469.93 Delayed Quote.9.75%
BEST INC. 3.42% 4.53 Delayed Quote.-18.53%
BOEING COMPANY (THE) 0.27% 180.81 Delayed Quote.-44.50%
BYD COMPANY LIMITED 13.55% 67.9 End-of-day quote.74.77%
CHANGE INC. 2.30% 7570 End-of-day quote.160.32%
DJ INDUSTRIAL 0.36% 25827.36 Delayed Quote.-9.50%
GENERAL MOTORS COMPANY 1.12% 25.24 Delayed Quote.-31.04%
LINE CORPORATION 1.83% 5570 End-of-day quote.4.11%
MAX CO., LTD. 1.66% 1528 End-of-day quote.-30.36%
NASDAQ 100 0.61% 10341.891881 Delayed Quote.18.42%
NASDAQ COMP. 0.52% 10207.628547 Delayed Quote.13.76%
S&P 500 0.45% 3130.01 Delayed Quote.-3.12%
THE GLOBAL LTD. 0.97% 209 End-of-day quote.-55.63%
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