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GDP Grew at 4.0 Percent in Third Quarter

The U.S. economy grew more briskly than first thought in the third quarter with robust car sales helping to more than triple the weak second-quarter pace while after-tax corporate profits also improved, the government said on Tuesday.

U.S. gross domestic product, a measure of all output within the country's borders, rose at a revised 4.0 percent annual rate in the July-September period after an anemic 1.3 percent gain in the preceding quarter, the Commerce Department said.

The revised growth rate came in above Wall Street economists' forecasts for a 3.8 percent gain. The department had originally estimated that the economy expanded at a 3.1 percent pace in the third quarter.

However, prices for U.S. Treasury bonds rose as investors, already concerned that the economy has since lost momentum, seized on a downward revision to business investment spending as a sign of lingering economic troubles.

Commerce said it raised its measure of growth for the period because inventory building by businesses was greater than first estimated, government spending stronger and the housing sector more robust.

"A pretty strong number," said Todd Finkelstein, director of fixed income at Boston Advisors. "Even without inventory building, the economy showed some clear strength."

A step-up in consumer spending, which rose at a 4.1 percent clip after a meager 1.8 percent gain in the second quarter, accounted for most of the quarter-to-quarter improvement in the economy's performance. A sharp gain in auto sales on the back of zero-percent financing deals and other incentives played a big role.

The report showed a 0.7 percent drop in business spending on facilities and equipment — the eighth consecutive quarterly decline — as the revisions erased a previously reported gain. However, within that category, spending on equipment and software staged a second straight quarterly advance.

A collapse in business spending led the economy into recession last year, and analysts say a solid rise in corporate outlays is needed to ensure a healthy, sustainable recovery.

The department said after-tax corporate profits posted their third consecutive quarterly gain, rising 2.1 percent after a 1.7 percent increase in the prior three-month period.

Inflation continued tame, with the closely watched price index for consumer spending up at a subdued 1.7 percent pace.

The department said businesses stockpiled goods at a rate much faster than thought previously, boosting inventories by $15.5 billion in the third quarter after a rise of just $4.9 billion in the second quarter. That increase accounted for nearly a half-percentage point of the 4.0 percent rise in GDP.

Government spending also rose much faster than estimated earlier, increasing at a 3.1 percent rate compared to the 1.8 percent pace reported a month ago.

Housing went from being a drag on growth to a plus. The department said home sales rose 2.1 percent in the third quarter, an upward revision to an initially reported 0.8 percent drop.

While growth in the third quarter was strong, several signs — including weakness in manufacturing and a slide in auto sales — had suggested the economy began to brake sharply as the quarter drew to a close, and economists expect much weaker growth in the final three months of the year.

"There are clear indications this quarter will be much weaker than the third quarter," Finkelstein said.

Concerned by signals the economy was flagging, the Federal Reserve earlier this month lowered the benchmark federal funds rate by a half-percentage point to a fresh four-decade low of 1.25 percent, saying the move should help the economy through its "current soft spot."

More recently, some hopeful economic signs have emerged — initial claims for jobless benefits have fallen, existing home sales staged a solid rise in October and the stock market has been climbing for several weeks.